The property sector is fast cottoning on to the power of green bonds and other sustainable financing mechanisms to create a more sustainable built environment, including the residential market.
Speaking at an ANREV sustainable finance breakfast seminar in Sydney on Tuesday, Qualitas managing director for debt and capital at real estate financier Tim Johansen said Australia’s emerging build-to-rent sector poses an opportunity for improving the sustainability of residential building stock.
“Given it’s a nascent industry, you are able to help how that market progresses,” he says.
That’s why the real estate financier and investment manager is marketing a build-to-rent debt fund for these projects to local and overseas institutions.
He says it’s important that the fund has a strong sustainability overlay so that the loans go towards projects that meet requirements on lower carbon emissions.
“Our view is occupiers and users, the Millennials, are mindful around environmental requirements.”
He says that over time they will likely pay higher rent if buildings are more efficiently operated.
Sustainable finance on growth trajectory
Most sustainable finance mechanisms are on the way up, including green bonds. According to Grace Tam from Clean Energy Finance Corporation, which at the event announced its partnership with GRESB as an investor member and industry partner, greens bonds now tend to be oversubscribed. GRESB assesses and benchmarks the ESG performance of real assets.
Sustainability-linked loans have also grown. Different from green bonds, explains GRESB head of Asia Pacific Ruben Langbroek, sustainability-linked loans are much closer to corporate loans except they have sustainability targets that can be monitored and tracked.
He believes they are popular because they are “pretty similar to a traditional loan process” but have specific agreements on sustainability performance targets.
“The interesting thing is you can tie meeting those targets with all types of incentives, such as a reduction in interest rates. It’s essentially free money for doing good.”
Other loans have increased penalties if ESG performance starts to slip.
The next place to watch will be adaptation bonds, says Langbroek, based on how infrastructure – for buildings, transport and water – will deal with climate impacts.
This will be challenging because it’s not easy to predict how buildings and other infrastructure will need to adapt.
Unlocking more sustainable finance with existing data stores
Despite the growth in green finance, the reliability of “greenness” indicators remains a chief concern.
That’s where the green building data collected by of NABERS, Green Star and GRESB will come in handy.
The three rating schemes have joined forces to release new guidelines explaining how different rating tools can be used for green loans issuers, investors and other stakeholders.
It helps that Australia has more high-quality data building performance than any country in the world on, according to NABERS director Carlos Flores.
Flores says the strength is the use of data at a granular level. Many of the major players have been measuring the water and energy performance of their buildings and portfolios for some time.
“We have more data than anywhere in the world. So the next stage for finance is how do we build on that?” he says.
Flores says the purpose of the guide is to mainstream green bonds and green loans, and the use of existing rating tools.
“To me, one way of mainstreaming it is using the data and there are so many people who could issue green bonds today and they don’t know it.”
The document is intended to reach a wide audience. “If you are an expert in finance this might sound basic but you aren’t necessarily the audience, it’s your clients.”
“We all know that green finance and green debt is such a powerful mechanism but I don’t think yet that anyone in this room thinks we’ve reached this potential.”
Green finance in action
General manager for corporate sustainability at Investa, Nina James, shared her company’s experience with green bonds and green loans.
“We’ve been on this journey for more than 10 years of having the best performing sustainability assets in the country, and now we can start to leverage that into debt,” says James.
The first two certified green bonds replaced existing debt facilities, which is an option not all businesses are aware of.
“The assumption is you take on green debt to provide capital for a green project, but that’s not necessarily the case.”
The debt facility was being used across entire portfolios “because we’d been doing that work for 10 to 15 years [so] we were able to tag all assets against that green debt”.