Past and present green finance trends in real estate

Because of the growing interest among investors and management in ESG aspects, the green finance industry has expanded rapidly in recent years. Green finance refers to the use of money in ways that are intended to have a beneficial effect on the environment. Not to be confused with sustainable finance, which takes into account not just the environmental but also the social and governance aspects of ESG, "green finance" (or "green investing") concentrates solely on the environmental part of ESG. Green finance refers to the use of money in ways that both benefit the environment and may be expected to yield a financial return.

Green finance: the fundamentals ​ Green finance allows banks, FIs, and governments to incorporate ESG principles into their real estate projects. Among green finance tools, green bonds are by far the most widespread. Moreover, the Green Bond Principles (GBP) were issued in 2014 by a consortium of international banks, Investors, and issuers in conjunction with the International Capital Market Association, making the green bond market the most developed financial instrument in terms of green finance definitions and tracking (IMCA). The Green Bond Principles (GBP) offer issuers with guidance on the essential elements necessary in establishing a credible green bond and guaranteeing the availability of sufficient information to evaluate the environmental impact of a green bond investment. With the use of industry-wide disclosure practices, they also aid underwriters in arranging deals. ​ A green bond is a type of bond in which the proceeds may only be used to finance new or existing eligible "Green Projects" that are compliant with the four major components of the Green Bond Principles (GBP) established by the International Maritime Contractors Association (IMCA). The primary distinction of a green bond is that the money it generates must be put toward "Green Initiatives." Alignment entails four main parts: (1) how the money will be spent, (2) how projects will be evaluated and chosen, (3) how the money will be managed, and (4) how progress will be reported on. ​ In order to qualify as a "Green Project," a loan must be utilized to finance one of these projects, and all proceeds from the loan must go toward financing green initiatives. Green loans are agreements between a lender and a borrower, and while they are similar to green bonds, they are typically smaller and structured differently. A green loan also follows its own set of principles that are in line with those of a green bond. ​ ​ Current Trends ​ Institutional investors are currently prioritizing ESG considerations in their decision-making processes. These investors must stay up to date on a regulatory and legislative environment that is getting stricter and calls for investments that are good for the environment. An example of this is Local Law 97, which was passed by the New York City Council in April 2019 as part of the Mayor’s New York City Green New Deal. This law says that most buildings over 25,000 square feet have to meet new limits on how much energy they use and how much greenhouse gas (GHG) they release by 2024. In 2030, the limits will be even stricter. Because of this, Commercial Property Assessed Clean Energy is becoming more popular on the capital markets of today (C-PACE). ​ Commercial Property Assessed Clean Energy (C-PACE) is a way to pay for the costs of making improvements to commercial property that use renewable energy or save energy. The up-front costs of these improvements are paid for with borrowed money, which is paid back over time through a voluntary tax assessment. Warren Friend of Pemaquid Advisors, LLC says that 40% to 70% of all carbon emissions in major US cities come from commercial real estate. About $14 trillion is how much the commercial real estate in the 25 largest US cities is worth. Local Law 97 in New York City, which sets limits on how much greenhouse gas (GHG) can be emitted, is seen as a model for other cities. However, the harshness of the rules that take effect in 2030 may present significant risks to real estate investments, which could lead to a decline in values and tax revenues. C-PACE financing can help property owners deal with these problems by giving them more power to fix, improve, or build their properties so that they meet these new rules. ​ JLL recently talked about how a rise in green lending based on sustainability performance and building certifications is linked to a correlation between the two. ING Bank offers green building incentive loans to pay for energy-efficient retrofits, and Allianz Real Estate gave the Canary Wharf Group in London a £140 million green loan, among other things. So, what is at the center of this rise in a market for green finance that is growing? ESG has ushered in a new era in real estate and become a top priority for both limited partners and general partners (LPs and GPs) around the world. However, there hasn't been much consistency in terms, projects, and eligibility criteria for what makes a project a "Green Project." For example, there is no one standard for what a "green building" is or what "Green Projects" should be in order to qualify for a "green loan." Also, there isn't a standard way to report, so regulators, investors, and lenders are worried about greenwashing when it comes to making sustainable loans. Green finance is defined by banks, financial institutions, governments, and international organizations based on their main goals. For example, financial institutions focus on sustainability indices, banking associations have set guidelines for green lending and bonds, and international organizations have started programs to help people invest in ways that are good for the environment. The Sustainable Banking Network wants to get local banks to use banking practices that are good for the environment. The United Nations Principles for Responsible Investment (UNPRI), on the other hand, is the largest global project for reporting on responsible investment. Its goal is to better understand, prevent, and reduce ESG risks. Today, the market is seeing more green finance because more standards have been agreed upon. Allianz made its loan decisions based on the UK Loan Market Association's Green Loan Principles and the Building Research Establishment Environmental Assessment Methodology (BREEAM) scores. Fannie Mae recently agreed to use BREEAM Residential Plus as a standard for judging loans in the United States as part of its Multifamily Green Initiative. ​ Also, investing in real estate that is good for the environment can make buildings worth more, which led to the idea of "green premiums." Investigations into this idea have shown that getting green certifications can lead to rent increases of 6.0% and sales increases of 7.6%. Now, because investors want to make more money and the rules have changed, the focus is not just on increasing the value of a building, but also on keeping it at its current value to avoid the risk of doing nothing. ​ ​ Conclusion As institutional investors pay more attention to environmental, social, and governance (ESG) factors, green finance is likely to become more common and standard in the real estate industry in the coming years. Investment managers in the modern world need to be aware of the social and economic benefits of green finance in order to create long-term value. ​ Katie Orr of Lebec Consulting says that almost 40% of the world's carbon emissions come from the real estate industry. To decarbonize the built environment, which will cost $5.2 trillion over the next ten years, the industry needs green finance. Green strategies can lead to higher occupancy, rents, tenant retention, and overall value, all of which are important not only for the health of the planet but also for the returns of real estate investors. In the last ten years, global green finance has grown by a factor of 100 and has been going up steadily. This is very important if we want to meet the goals of the Paris Agreement and reach net zero carbon by 2050. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​