Socially conscious investors are turning their attention to sustainable finance, as Environmental, Social and Governance (ESG) considerations play an increasing role in property decision making.
With climate change in the headlines, and investors setting ambitious global emissions targets, there is growing recognition that real estate assets could risk obsolescence if they’re not upgraded to meet higher sustainability benchmarks.
This is particularly the case in countries that have set - or are positioning towards - 2050 carbon neutrality targets.
Sustainable development and investment will play a central role in this transition, which is spurring lenders to develop initiatives to incentivise borrowers and investors to table a growing number of ESG requirements when they assess suitable acquisitions.
This has been central to the growing popularity of green loans - an established and acceptable form of funding in EMEA and the US, experiencing positive year on year growth.
European capital has been at the forefront and momentum is growing in the Americas, with the Asia Pacific region now following suit.
Green loans are debt facilities used to fund sustainability projects or developments. They need to align with Green Loan Principals, which are a set of voluntary guidelines used in markets globally as per the following:
1.The use of funds. The use of the loan should be clearly described in the financial documents. All defined projects/security should detail clear and verifiable environmental benefits.
2. The process of evaluation and selection of projects. The borrower should clearly inform the funder of the sustainability objectives; the process chosen by the borrower to determine how project/security meets proposed credentials; and the related eligibility criteria
3. The management of funds. Undrawn proceeds of green loans should be held in a specific account with draws monitored to ensure transparency and promote the integrity of the product.
4. Reporting. The borrower must provide reporting on use of the funds on an annual basis until the funds have been fully drawn and, if necessary, to refinance.
In many instances, lenders are incentivising borrowers to enhance a project or building’s environmental credentials in return for a reduction in overall interest expense. In addition to demonstrating corporate responsibility, real estate assets with strong environmental credentials are seen to be resilient assets that are less risky and future proofed, making them sought-after investments.
The Green Loan Principals act as a mitigant to “green washing”, which is an attempt to capitalise on the growing demand for environmentally sound investments, often conveying a false impression around environmental performance. These Green Loan Principals ensure legitimacy and genuine sustainability outcomes.
A key driver for green finance is shareholder / investor pressure and competition by domestic fund managers to attract and retain mandates from international investors.
Australia is considered one of the most robust investment safe havens in the world and a leading market for international investment. Over the past 10 years, these offshore buyers have accounted for, on average, 35% of all commercial real estate transactions and have led the interest in green loans – being familiar with the concept in their home markets and often required to apply ESG investment criteria.
This is now filtering through to domestic fund managers, who are driving greater local demand for green loan products as they jockey to attract offshore investor mandates.
However, at this point, green lending is still at an embryonic stage in the Pacific region, both in terms of development and acceptance.
The ability to track fund flows, coupled with a lack of knowledge around the requirements to comply with Green Loan Principles, are the primary hinderances.
However, the tide is turning, given the ever-increasing awareness of green loans and the enhanced investor focus on developing a greener economy, future proofing investment portfolios and developing reputational and competitive advantage through ESG initiatives.