Buzzwords such as ‘green buildings’, ‘green lending’ and ‘sustainability’ are becoming ever more widespread in the lending market. As part of the ‘Green Agenda’ national bodies are looking at developing and instigating sustainable development strategies.
The energy from fossil fuels consumed in the construction and operation of buildings, accounts for approximately half of the UK’s emissions of carbon dioxide, with housing alone generating 27% of UK emissions. With the UK’s target to reduce its carbon emissions by 80% by 2050, the real estate sector will be a target.
Globally, sustainability goals are being set and this is filtering down to corporate organisations and their advisors, lenders and investors. This is evidenced by the influence of GRESB, an industry-driven organisation focused to assess the sustainability performance of real assets around the world. In addition, there are financial incentives for adopting green policies (green buildings can offer better collateral for investors to lend against). This is in addition to the potential devaluation of properties which do not look to implement sustainability measures.
There is no current definition of ‘green lending’ but one interpretation is that it is lending which is subject to fulfilment of certain environmental criteria, for the planned use of funds. Lenders may look to assess a borrower’s sustainability strategy and the underlying sustainability risks in real estate collateral.
Through the Better Buildings Partnership, a collaboration of the UK’s leading commercial property owners, some areas are looking to improve the sustainability of the existing commercial building stock. Green lending is very much a developing concept, defining what ‘green’ remains challenging in different scenarios (a consistent methodology to apply in every transaction is yet to be developed). Importantly, where property is leased, borrowers will not always have control, which could create further difficulties to implement a green strategy.
In contrast, the concept of a green bond is a more developed. Green Bond Principles have been developed by The International Capital Market Association with the support of issuers, investors and intermediaries to provide guidance. It has been suggested that the way forward for the lending market may be to develop guiding principles on which to base the foundations of green lending (which in turn will lead to standard clauses being incorporated into finance documents, lease agreements and other relevant documents).
There is a long way to go with this and any impact from recent political changes are yet to filter through in this area but it will be an interesting sector to monitor going forward.