What will happen to companies that don’t pursue the green route

The United Nations indicates that over 9,000 companies, 1,000 educational institutions, and 600 financial institutions have already joined the race to net zero.  

While growing support for climate change action is a necessity, the cost of this pursuit for specific industries is often a topic that receives lesser attention. For the property sector, billions of dollars are required to electrify building stock and eliminate embodied carbon in achieving net zero. 

This is why green loans and sustainability linked loans have become increasingly prevalent in reflecting the property market's commitment to responsible and sustainable lending. Green financing has notably been rewarding building owners with an interest rate discount and is fast becoming one of the keys to accessing capital in today's competitive market. 

But what will happen to the companies that don’t follow this green route? 

What’s at risk is beyond just brand reputation and is a topic explored in a recent Talking Property podcast featuring Nicole Yazbek-Martin of the Australian Sustainable Finance Institute, Rory Martin, former Vice President Group Sustainability for Frasers Property, and Daniel Sollorz, CBRE's Debt & Structured Finance Head of Origination for New South Wales. 

Why companies are going green 

Simply put, the drive behind green loans and sustainability linked loans stems from a business environment where access to capital is becoming harder and more competitive. 

“Organisations who have their house in order are going to appear a lot more attractive and appealing to lenders who still need to do deals and get capital out there,” explains Rory Martin.   
“If you're well-versed and responsible in how you approach green financing, you're actually going to be more attractive because you can potentially attract a lower risk in that you're managing your emissions.  

“We know a lot of lenders now are seeking to reduce their financed emissions or the emissions associated with their loan products. So, if you're making their job easier by having a decarbonisation plan or similar, you're going to be first in line.”  

This isn’t just an educated guess from Rory, with numerous industry anecdotes detailing how organisations that are well-versed in this space are seen as more competitive and attractive. And naturally, where there are winners there are also losers.  

What happens if you don’t go green 

While companies in Australia are receiving benefits for their green initiatives, there’s a bolder shifting sentiment in other parts of the world – it's now an expectation from lenders that companies need to be committing to sustainability. 

“If you're not doing it, then it'll be leading more towards a penalty as opposed to a benefit,” says Rory. In industry speak, that equates to a green bonus versus a brown discount. And there’s evidence of this.  

“The Europeans penalise borrowers in a lot of cases where they're not pursuing sustainability commitments within their facilities.  

“We're also seeing a lot of the Asian banks on the other end still offering green benefits, and we're seeing the Australians starting to shift to the middle ground where there's still green benefits, but now with the introduction of brown penalties.” 

Given the current trajectory, the experts have some advice for companies still on the fence about sustainability: Start thinking about how you'll manage your ESG-related risk or at least begin asking questions as the lending landscape begins to rapidly shift towards the penalty space.  

Why taxonomy in green financing matters 

The word ‘tax’ often conjures thoughts of tedious spreadsheet tasks that no one wants to dedicate a weekend to. But in the property sector, sustainable finance taxonomy is actually a very simple concept: It’s a shopping list for the future. 

“A sustainable finance taxonomy is a framework tool. It classifies and defines economic activities based on the sustainability objectives,” explains the Australian Sustainable Finance Institute’s Nicole Yazbek-Martin. 

“It identifies economic assets, activities, and investible measures across the whole economy. When we're talking particularly about the property sector, those are activities that make a substantial contribution to climate change mitigation or what we can call net zero-ready.” 

Its necessity is especially warranted in a world which is increasingly pursuing a transition towards a net zero economy.  

“If we want to operate within safe climatic limits, then our whole economy needs to transform in a way that is aligned to a net zero outcome. What are the activities? What are the things that we need to do? How do we need to do things differently in order to be operating in that net zero world?  

“Knowing the answers helps investors and lenders speak the same language. It provides them with the confidence that when they're assessing an asset, labelling something, or structuring a deal, that they’re aligning it to the activities that are driving the sustainability outcomes they're seeking.”  

Without this common language system, companies are constantly placed at risk of greenwashing. And if the sustainable finance taxonomy framework is something every stakeholder can agree on, it can potentially increase investor and consumer confidence along with more capital flowing through a more targeted approach.  

Benefits of Australian property taxonomy 

The pragmatic reasons for a sustainable finance taxonomy certainly exist, but given that many of today’s Australian borrowers are at different stages of their journey towards sustainability or decarbonisation, could a taxonomy also help them get their house in order? 

The short answer is yes. 

“The taxonomies will bring a little bit of order to the chaos by providing a set of common language and objectives, so it gets everybody on the same page,” Rory confirms.  

Beyond systematic harmony, a sustainable finance taxonomy could also bear other forms of fruit – extra finance flowing into the Australian market. 

“I think it'll certainly help with the appetite for sure,” says Daniel Sollorz, CBRE's Debt & Structured Finance Head of Origination for New South Wales. 

"Having been involved in the commercial real estate funding market for a while and reflecting on the last 10 years, the level of sophistication has increased. The maturity and the innovation in funding solutions has seen a dramatic shift and improvement over that time.  

“One of the key concerns I hear when talking to lenders is how they think it through their origination requirements and what they're looking at in the backend of their facilities. They can today look at what they've got, but in three to five years, the world's going to be a different place. And that could be in relation to values if an asset is more brown than what it is green.  

“It could also do with the availability of debt finance at that time to repay the loan. So, the firmer and stronger the protocols are in place initially, lenders will gravitate to greater certainty.”  

Lender sentiment on going green 

Understanding how lenders view debt capital and green financing initiatives is a final key factor for decarbonising companies to be aware of.   

“When you take a green loan or a sustainability linked loan opportunity to a lender, you'll get the meeting organised very rapidly and receive very positive engagement,” Daniel confirms. 

“And that's regardless of the opportunity - whether it's acquisition, repositioning, repurposing - it's across the whole range of opportunities.”