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The first wool insulation was fitted to three farm houses on state-owned Pamu's Waimakariri farm this month.
In a statement, chief executive Steve Carden said Pamu had more than 500 houses throughout New Zealand, housing its workers and their families, and it was important they were well insulated.
Following an insulation assessment across its housing portfolio, the company decided to insulate with wool.
"Wool's benefits are significant and environmental impact is minimal and it was a no-brainer, particularly as a company that farms a lot of wool," he said.
The current upgrade programme and all future insulation undertaken by Pamu would be done with recycled wool through Christchurch company Terra Lana.
Terra Lana, which has a purpose-built factory in Bromley, produces building insultation and eco-textiles from recycled wool.
Its building insulation products capitalised on the work done by the Wool Research Organisation of New Zealand in the 1990s.
It used that work to produce commercially saleable products and, in 2002, was the first New Zealand company to have wool-based insulation products appraised by the Building Research Association of New Zealand.
Pamu was also working with Terra Lana and its partner T & R Interior Systems on high-tech acoustic panels launched this month, which would use Pamu-supplied wool.
"Wool is an exciting product - from woollen surf boards to woollen insulation, wool's sustainability and biodegradable properties are very appealing as we create products and experiences for a new breed of environmentally conscious consumer," Mr Carden said.
New Zealand Merino Company chief executive John Brakenridge said wool insulation was becoming an important category for New Zealand's strong wool sector.
During his 2017 election campaign, New Zealand First leader Winston Peters promised his party would specify government-funded buildings install natural fibre carpets like wool, and the use of wool insulation.