Investor demand for green bonds in real estate is growing globally; however, issuance by commercial real estate companies is limited. Senior Director at S&P Global Ratings, Eric Tanguy, explains why a more streamlined and standardised method of evaluating green bonds is necessary.
Green bonds – debt issued to fund environmentally sustainable projects – are increasingly aligning the interests of commercial real estate tenants, commercial real estate companies (CREs) and investors. Via green bonds, tenants can meet their aims to rent more environmentally friendly, energy efficient properties, CREs – often Real Estate Investment Trusts (REITS) – can acquire new funds to develop environmentally sustainable assets and investors can acquire sustainable debt instruments.
Despite this, green bond issuance in real estate has been limited. In this respect, the lack of formal standardisation in the green bond market, including clear guidelines as well as green bond transparency and governance reporting, remains a barrier to growth.
Aligning common interests
A growing number of companies are incorporating their environmental impact, or ‘sustainability data’, in their annual reporting. With this in mind, it’s not surprising that a recent survey of 120 European global corporations finds that sustainability and environmental risk concerns rank equally with geopolitical issues, and higher than currency fluctuations, emerging market competition and energy prices (CBRE European Occupier Survey 2015/2016).
The United Nations Environment Program reports that buildings alone use about 40% of global energy, and emit approximately one-third of greenhouse gas emissions. Commercial real estate tenants, mostly large international corporations, are therefore increasing their efforts to rent energy efficient, sustainable buildings to reduce their expenses, while also highlighting their greater awareness of climate change issues.
This in turn helps CREs with environmentally sustainable assets to collect competitive rents and reduce building vacancies – especially in oversupplied markets, like in Paris or Milan, where sustainability certification can affirm market leadership.
Not only does “green” real estate strengthen CREs’ competitive positions, “green” financing also allows CREs to tap into significant investor demand, looking for green financing instruments to diversify their portfolios.
This trend is occurring because investors increasingly see green bond issuers better attuned to climate change risk, and green bond-backed projects as better able to adapt and contribute to the future economy. Emerging corporate green bonds can also deliver higher yields than bank and supranational issued green bonds, which currently account for the majority of the green bond market.
So what is holding green bonds back in real estate?
Despite the growing awareness to the benefits of green bond issuance in real estate, a higher level of standardisation, including a standardised method of monitoring the governance and transparency of green bond proceeds, is required to reach a higher level of issuance and a larger pool of investors. Increasing standardisation may include developing the transparency, governance, and environmental impact of green bond proceeds.
Currently, the green bond market lacks a uniform sector-specific framework that unifies green bond criteria and commitments for the use of proceeds. In other words, investors need to spend extra time to evaluate how “green” investments in certain real estate projects actually are, as well as ensure that proceeds for green projects are governed appropriately.
Moreover, reporting the “greenness” of bonds involves additional fees and costs associated with external reporting, secondary opinions and various third-party certifications. For this reason, green bond issuance is constrained to large highly-liquid issuers that can afford these expenses. A more defined sector-specific framework would likely limit many unnecessary costs faced by issuers, thus opening the door to a wider pool of entrants.
Achieving standardisation in the green bond market will take time and effort. Currently, green bond certification is evaluated through either BREEAM (Building Research Establishment Environmental Assessment Method), HQE (Haute Qualité Environmentale i.e. high environmental quality standard), or LEED (Leadership in Energy & Environmental) assessments, which measure various indicators of “green” such as carbon emissions, water efficiency, and building materials.
These certifications are important to providing some level of standardisation for assessing “greenness”; in the medium run, the success of green bonds will be judged on its appeal as a funding alternative in real estate, with mounting issuance momentum helping to tackle the lack of market standardisation.
This may take the form of a unified, more comprehensive assessment method measuring the environmental impact, governance and transparency of different types of green bond proceeds. For this reason, S&P Global is in the process of developing a green bond prototype, the “Green Bond Evaluation”, which will be released towards the end of this year.
Like our Facebook Page
Guidelines for Finding the Best Solar Panels for Intense Weather
4 Incredibly Easy and Eco-Friendly Ways to Get Rid of Your Junk
Eco-Friendly Decisions That Will Enhance Your Quality of Life
List of Fantastic Places for Green Consumers to Settle in South Carolina
Old House, New Energy: Save the Planet and Energy Through Proper Heating
6 Amazing Eco-Friendly Bedroom Design Ideas for Sustainable Homeowners
5 Great Ways to be a More Environmentally-Friendly Cannabis User
How to Step up Your Academic Game When Studying Environmentalism Abroad
Amazing Approaches to Cycling for Promoting a Greener Lifestyle
Understanding The True Environmental Impact of Dentistry
Eco-Friendly Decisions That Will Enhance Your Quality of Life
From Store to Door with Minimal Impact: How Companies Are Eco-Friendly Innovators
A Guide to Investing In Renewable Energy Stocks in 2021
Creative Ideas to Practice Eco-friendlier Consumerism
Hawkers Launch a Truly Innovative Eco-Friendly Sunglass Line
Everything You Need to Know Before You Start Using Renewable Energy in 2021
The Curtis Institute of Music Makes Facilities More Energy Efficient
What Can Ecotourists Learn from Visiting Chernobyl?
5 Essentials for Promising Eco-Friendly Businesses to Thrive in a New Economy
Charity Organizations Who Are Taking Steps to Become More Environmentally Friendly
- Editors Choice12 months ago
10 Green Companies With Amazing Environmental Initiatives
- Features12 months ago
5 Sustainable Home Improvement Ideas To Improve Your Home’s Value
- Energy12 months ago
10 Amazing Energy Saving Hacks for Spring
- Invest11 months ago
4 Super Simple Solutions To Create The Perfect Eco-Friendly Home