Since the Central Financial Work Conference in October 2023 proposed to “improve the supervision system and capital supervision of real estate enterprises”, financial institutions have been “improving the macro-prudential management of real estate finance” on the one hand, and actively promoting the implementation of financial support for the “three major projects” on the other. As we all know, the “three major projects” refer to the construction of affordable housing, the transformation of urban villages, and the construction of “dual-use” public infrastructure. They are considered to be an important starting point for implementing the new model of real estate development, and a long-term mechanism and important entry point for stabilising the real estate market. However, how can the related supporting funds be in place in compliance with regulations and truly play an active role in stabilising growth? This article intends to study the connotation of carbon-neutral buildings from the perspective of lawyers and legal practitioners, as well as how the latest ESG financial instruments can comply with regulations and help the development of carbon-neutral buildings.
Internationally, green buildings should meet the following three elements:
First, carbon management of buildings should be carried out throughout their life cycle. In addition to the completion acceptance, the carbon emissions during actual operation or residence after they are put into use should be comprehensively examined. That is, the construction and supervision perspective of the builder should be changed to the user perspective for continuous management. In existing projects, after the 2-5-year engineering warranty period from the date of completion acceptance, all quality problems are borne by the user. For ordinary second-hand houses with an age of more than 8 years, minor problems begin to appear, and they are inevitably repaired and even renovated. Indoor repairs and renovations of old houses themselves also increase carbon emissions. From a market perspective, houses with an age of less than 5 years (commonly known as “second-hand houses”) are more affordable than newly built commercial houses, but more popular than ordinary second-hand houses, which can also explain many practical problems.
This is not a new concept. From the perspective of international standards, ISO15686 (Building Environmental Performance Assessment) and the WELL Building Standard require the accounting of carbon emissions from the design, construction, operation to demolition of buildings (covering embodied carbon and operational carbon). Among them, embodied carbon accounts for about 30%-50% (data source: World Resources Institute). Durability directly determines the life of a building, and extending its life can significantly reduce the embodied carbon generated by demolition and reconstruction. First of all, the premise of the entire life cycle is material selection. Low-carbon building materials (such as recycled concrete and CLT cross-laminated timber) should be given priority and the use of high-carbon footprint materials (such as cement) should be reduced. For example, the EU Energy Performance of Buildings Directive (EPBD) requires all new buildings to achieve zero emissions after 2030. Secondly, a carbon-reducing energy use system is also a necessary condition. Europe has mandated the integration of renewable energy (such as photovoltaics and ground-source heat pumps) and complies with the EU’s 2024 Renewable Energy Directive (REDIII) requirements for building decarbonisation.
Second, buildings should be resilient to adapt to climate change. Generally speaking, it means that they must comply with the “Climate Adaptability Guidelines” issued by the Intergovernmental Panel on Climate Change (IPCC), such as improving the flood resistance and thermal insulation performance of buildings, and avoiding physical risks and transition risks caused by extreme weather. In the context of frequent climate disasters, buildings with poor durability are easily damaged by extreme weather, resulting in repeated investment and carbon emissions. Japan requires in the “Building Standards Law” that the seismic performance of buildings must be supported for more than 100 years, which is essentially to reduce the risk of the entire cycle. Although my country has clearly stated in the “National Climate Change Adaptation Strategy 2035” (Environmental Climate [2022] No. 41) issued in 2022: “Fully consider the medium- and long-term impacts of climate change in the planning, design, and approval of urban buildings and infrastructure construction projects”, when owners and developers plan buildings to choose internal insulation or external insulation, the results still depend on the specific project budget.
Third, green buildings should be legally compliant. Green buildings should meet the carbon disclosure requirements of various countries (such as the EU CSRD and the US SEC climate disclosure rules) and respond to carbon taxes, such as the EU Carbon Border Adjustment Mechanism (CBAM), also known as the carbon border tax or carbon tariff. The CBAM policy mainly targets carbon-intensive industries, including cement, steel, aluminium, fertilizers, and electricity, which are the main raw materials for the construction industry. The use, consumption, and emissions of such products in green buildings during construction and operation should be disclosed sustainably.
Therefore, from an international perspective, it is not just limited to meeting the green building review during design-construction and building completion acceptance, but the core is sustainable use, energy conservation and carbon reduction, and even social responsibility. Therefore, the author believes that carbon-neutral buildings are the trend of the future. They refer to buildings that achieve zero carbon dioxide emissions by offsetting carbon emissions and carbon absorption throughout the entire life cycle (including design, construction, operation and demolition). This type of building has a positive impact on the environment by minimising greenhouse gas emissions through the adoption of efficient energy-saving designs, the use of renewable energy, and the implementation of carbon compensation measures. Simply put, the core of carbon-neutral buildings is to extend the life of buildings, reduce operating energy consumption, and make materials recyclable. And the root lies in the durability of buildings.
The real estate development and construction projects that have been rising since the 1990s have not only improved the living conditions of residents, but also made an indelible contribution to the “investment” sector, one of the three pillars of my country’s trade, investment and consumption. However, technological progress also highlighted the problem of housing quality at that time. With the factors of industrial empowerment of the construction industry, industry promoting urban renewal, and residents’ comfort proposing the renovation of old houses, urban renewal and old house renovation have become foreseeable market demands. How to use green financial tools to obtain more convenient financing support is a matter of great concern to all market players, including builders, construction parties, material suppliers, and even individual users. After all, the implementation of the carbon neutrality initiative still requires funds in practice, and all market players need motivation. In addition to the financing advantages unique to central state-owned enterprises, private enterprises, listed companies, and even small market individuals, if they can obtain recognition and financing convenience from a market perspective, is a topic that needs further discussion. As a product that has quietly contributed to carbon neutrality in recent years, insurance funds and tools are particularly worthy of in-depth study by legal workers.
In April 2024, the “Guiding Opinions of the State Financial Supervision and Administration Bureau on Promoting the High-quality Development of Green Insurance” (Jingui [2024] No. 5) clearly stated: Green insurance refers to the general term for economic activities such as risk protection and financial support provided by the insurance industry in environmental resource protection and social governance, green industry operation and green life consumption… Accelerate the promotion of green insurance management, model and service innovation, and explore new paths for insurance to support green development. Accelerate digital reform, strengthen scientific and technological support, enrich the green insurance product system, and improve the level of green insurance services… By 2027, the green insurance policy support system will be relatively complete, the service system will be initially established, the risk reduction service and management mechanism will be optimised, the product service innovation capability will be enhanced, a number of green insurance service models with typical demonstration significance will be formed, the growth rate of green insurance risk protection and the growth rate of green investment of insurance funds will be higher than the overall growth rate of the industry, and the role of green insurance in promoting the green transformation of the economy and society will be enhanced… The insurance industry should strengthen risk protection for public infrastructure, urban housing, rural houses, personnel, etc., and actively respond to natural disasters. Orderly develop meteorological index insurance, and innovate the “insurance + meteorology” service mechanism… Promote energy conservation, carbon reduction and efficiency improvement in urban and rural construction. Provide insurance protection for risks related to building energy conservation, such as renewable energy substitution and rooftop photovoltaic systems. Develop green building performance insurance, ultra-low energy consumption building performance insurance and other businesses, further promote risk reduction services in the field of building energy conservation and green buildings, and conduct green performance risk management and control throughout the project planning, design, construction, and operation. Provide insurance protection services for green farmhouses, energy-saving and low-carbon facilities, renewable energy equipment, rural power grids, etc. Strengthen publicity and exchanges. Industry self-regulatory organisations should actively build publicity and exchange platforms, organise and carry out various forms of publicity activities, disseminate green insurance concepts and policies, and create a good environment conducive to the development of green insurance. It is necessary to strengthen exchanges and cooperation with green industry enterprises, research institutions and other organisations, actively carry out foreign cooperation and exchanges, promote the joint construction of systems, guidelines and standards, and jointly promote green and low-carbon development.
In practice, some property insurance companies have taken the lead in developing green insurance business. For example, Tokio Marine & Nichido Insurance Company has launched insurance business for replacement costs and launched green building insurance in the Asian market, covering aspects such as damage to solar panel equipment and supporting the use of low-carbon materials. In Europe, a leading insurance industry country, Germany’s Munich Re can provide renewable energy project insurance and energy efficiency performance insurance services, covering the risk of energy efficiency failure due to technical or operational problems, compensating for excessive energy consumption losses caused by passive house design errors, construction defects or equipment failures (such as additional energy costs or rectification costs after certification failure), and supporting green building certification (such as LEED) related protection; Germany’s ERGO’s long-term performance maintenance insurance can cover the periodic inspection costs and preventive maintenance costs of passive houses; Allianz Insurance Group has customised corresponding property insurance for green buildings, which can cover the loss of environmentally friendly materials and energy-saving systems, and physical damage to photovoltaic panels, inverters and other equipment (such as fire, theft), and additional clauses support post-disaster reconstruction according to green standards; Swiss Re currently has carbon credit insurance business, mainly for carbon credits (such as CERs) generated by photovoltaic projects, to protect value losses caused by policy changes or certification failures.
Based on the analysis of the above financial regulatory policies and the understanding of green buildings, the author believes that:
First, if carbon neutral building requirements are met in urban renewal and renovation of old houses, traditional financing tools can be used. Low-carbon renovation projects can generally obtain financial support through debt/equity investment. For example, the German Development Bank (KfW Bank) will provide low-interest loans for the installation of energy-saving equipment in existing buildings. Domestic green bonds and REITs can also use insurance funds to match the return cycle of urban renewal projects in the long term.
However, the renovation of urban villages involves a wide range of areas. If the government cooperates with the insurance funds as one of the investors through the PPP model, it can also share the policy uncertainty and environmental liability risks of the renovation projects. If the supply chain of building materials used in the renovation has high carbon emissions, it may face the disclosure obligations and litigation risks of the EU Corporate Sustainability Reporting Directive (CSRD); if the renovation of old houses causes damage to historical buildings, it may be necessary to bear civil, administrative, or even criminal responsibilities, and must comply with the provisions of my country’s Cultural Relics Protection Law; the renovation involves resident information (such as energy consumption monitoring systems), which must comply with GDPR or China’s Personal Information Protection Law. Therefore, the purchase of insurance policies and compliance with the law are essential compliance links in renovation.
Although insurance institutions and insurance funds play an important role in urban renewal and renovation of old houses, they should still do the following two things when conducting business: First, establish a complete ESG due diligence checklist and sustainable assessment system including the carbon footprint of the target building (using the GHG Protocol standard), the source of building materials and labour standards. At the same time, it can also be used as an evaluation criterion to examine whether the builder and operator have joined the “Net Zero Carbon Building Commitment” of the World Green Building Council (WGBC) and participate in international initiatives. Second, it can also learn from the Sustainable Development Linked Loan (SLL) project to establish dynamic compliance monitoring and track the carbon footprint of the financing project.
Carbon-neutral buildings are an emerging professional field that involves both supply chain management of key functional materials (such as cement modification) and verification of green technologies used in projects (such as whether zero-carbon building management systems have passed international UL9540 energy storage safety standards). Therefore, technology is needed first. The stability of labour and technical personnel and the supervision of project sustainability are indispensable conditions for project design, construction and operation. First of all, both the designer and the constructor need to be equipped with professionals and skilled workers (such as the German dual system training model). Once there is a shortage of labour, carbon-neutral buildings will become a mere talk on paper and a flower in the fog, and project sustainability supervision will become a formality. Therefore, my country can explore incorporating ESG performance into the evaluation weight of insurance funds participating in old renovation PPP projects (such as a weight of not less than 30%), and learn from SLL for dynamic management. In the project of converting into a carbon-neutral industrial park, insurance funds can require the project party to issue a “transition bond” (TransitionBond) to link indicators such as labour, technology, and materials with interest rates. In addition, the “regulatory sandbox” pilot can be promoted to allow insurance funds to pilot new cooperation models in the form of “regulatory exemption” in free trade zones or specific urban renewal areas, so as to redistribute the systemic risks of resource shortages in urban renewal. Ultimately, under resource constraints, the dual goals of social benefits (supporting urban low-carbon transformation) and financial sustainability of insurance funds can be achieved.
The constraints of the entire chain from design to operation rely more on mandatory compliance disclosure obligations and encouraging green certification binding. The EU Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose the carbon footprint of the building materials supply chain, forcing the use of low-carbon materials (such as recycled steel); the US SEC climate disclosure rules require listed companies to explain whether the choice of building materials meets the “scope 3 emission reduction” target. Both BREEAM (UK) and WELL (US) certifications use material durability (such as fire rating, anti-aging test) as hard indicators; China’s “Near Zero Energy Building Technical Standards” stipulate that the air tightness of external windows must reach level 8 or above, forcing the application of high-performance materials. Compared with the US LEED certification that focuses on water-saving technology, China’s green building evaluation emphasizes the performance of the envelope structure, and cross-border investment needs to dynamically adapt to standards.
In addition, data security is the core link to ensure transparency and credibility. Taking data monitoring companies such as Johnson Controls as an example, although their full-dimensional data monitoring capabilities provide technical support for carbon footprint tracking, they must also strictly abide by the “Personal Information Protection Law” and “Data Security Law” and other laws and regulations to clarify the legality of data collection, storage and processing, especially when it involves sensitive information such as user energy consumption and equipment operation, they must inform and obtain authorisation in advance. For projects involving cross-border data transmission (such as EU business), it is also necessary to comply with GDPR requirements, adopt the principle of data minimisation, and ensure compliance through standard contract clauses or security assessments. At the practical level of data disclosure, it is necessary to distinguish the boundaries between public transparency and privacy protection. Public disclosure should focus on macro indicators such as the overall carbon emissions of buildings and energy-saving efficiency to meet regulatory transparency requirements, while avoiding the exposure of specific equipment parameters or user identity information through technical desensitisation. In the scenario of regulatory accountability, companies need to open access rights to raw data (such as encryption interfaces) to audit institutions or certification platforms to support third parties to verify the accuracy of carbon footprints, but they need to limit the use of data through agreements to prevent information spill over. For example, when dealing with the issue of fraudulent photovoltaic panel subsidies, the State Grid Corporation or the local finance bureau may require companies to provide anonymised data (such as a household’s power generation and grid connection time) to verify the rationality of subsidy issuance, avoiding direct association with personal information such as house numbers or ID cards; if anomalies are found (such as A’s power generation is zero for several consecutive months) and further investigation is required, the data monitoring company may provide necessary information (such as the name of the household head, installation address, etc.) in accordance with the law after the intervention of the judicial authorities, but it must obtain the corresponding authorisation as a prerequisite to prevent data abuse. However, this type of supervision still has the following difficulties: on the one hand, if only aggregated data (such as the total power generation of the community) is disclosed, it is difficult to accurately identify individual fraudulent behaviour; but if personal information (such as house numbers) is excessively disclosed, it may infringe on citizens’ privacy rights and even cause data cross-border risks (such as the request of law enforcement agencies in the home country of foreign companies to retrieve data). In addition, if data monitoring companies need to transmit data back to overseas headquarters for analysis, they must pass the China Data Outbound Security Assessment and comply with the EU GDPR’s protection of the rights of data subjects, otherwise they may fall into compliance difficulties due to legal conflicts.
Finally, there is the legalisation of standards and the chain of accountability. If the energy-saving technology used (such as photovoltaic curtain walls) fails to pass the local fire certification of the Code for Fire Protection Design of Buildings (GB50016-2014), it may be deemed as an illegal building; if the building does not reach its expected life due to improper material selection, the designer may trigger the tort liability clause in Article 1203 of the Civil Code; if the operator fails to perform regular maintenance, resulting in a decrease in energy efficiency (such as dust accumulation in HVAC heating, ventilation, and air conditioning systems), it may violate the compliance audit requirements of the EU Energy Efficiency Directive (EED); some technologies are nominally low-carbon but actually have high embodied carbon (such as some “green concrete” still relies on cement), which is the “greenwashing” trap of comfort technology, and the builder will be verified for its carbon footprint in accordance with ISO14067.
In view of the above regulatory logic, the author believes that the regulatory paths under the legal framework include:
On the material side, a “low-carbon, durable, and traceable” supply chain can be built, and the blockchain platform can be used to trace the source of building materials to meet transparency requirements. On the technical side, compliance design can be embedded, and regulatory interfaces (such as carbon emission monitoring ports) can be reserved in the technical solution to adapt to future regulatory upgrades (such as SLL’s subsidy linkage requirements for building decarbonisation); cooperate with local certification agencies to pre-examine technical compliance.
In summary, the author believes that the core of carbon neutral buildings is: durability (extending lifespan → reducing embodied carbon) → materials (high performance + low carbon) → technology (comfort + low energy efficiency) → compliance (disclosure + certification). Its essence lies in transforming climate obligations into legally enforceable indicators (such as carbon footprint threshold values, technology certification lists) through material and technology selection, and ultimately achieving the transformation of “carbon neutrality” from moral advocacy to legal responsibility.
When ESG financial instruments are applied to carbon-neutral buildings, the “durability-materials-technology” triangle relationship needs to be embedded in the ESG due diligence framework, and through the two-way adaptation of international initiatives (such as the World Green Building Council’s commitments) and local regulations, the risk of “greenwashing” can be avoided and compliance value can be maximised.
The difficulty in practice is how to incorporate embodied carbon and supply chain ESG performance into investment evaluation; how to maintain coordination with international standards (such as the ISSB disclosure framework) to avoid regulatory arbitrage. It is recommended to combine local regulations (such as China’s “Green Building Evaluation Standard” GB/T50378) with international practices to build a resilient investment model under the “dual carbon” goal. The legal service market for China’s carbon neutral lawyers will have great potential!
Note: The views in this article were originally given by me at the Shanghai Financial Industry Association Foreign Investment Committee and Green Finance Committee on May 15, 2025, when I was invited to give a keynote speech at the industry exchange event “The Practice, Exploration and Challenges of ESG Investment under the Five Major Financial Articles”.
Be part of a growing global community committed to advancing in-house legal leadership.
1.0 Introduction Cross-border mergers and acquisitions (“M&A”) offer international investors access to new markets, technologies and customers, but they also create complex legal and regulatory...
In business disputes, one frequent concern is the risk that a party might attempt to dissipate assets by selling, transferring, or concealing them to avoid...
Learn more about Navigating Asset Freezing Orders in DIFC & ADGM
