WATCH “‘Why?’ just isn’t a question we get asked anymore when it comes to putting green and sustainable finance on the agenda,” says Gregor Bamert, Aviva Investors’ head of real estate debt. “The focus now is on how it can be implemented. That is so exciting. We have an opportunity to align corporate strategies – where sustainability absolutely needs to be a core element – with financing strategies.”
Speaking as part of EG’s Green Finance vodcast, Bamert was not alone in his thoughts on real estate’s meaningful – and increasingly widespread – move towards a “how, not why” approach to ESG-friendly finance.
“The industry has woken up to this in a big way,” says Longevity Partners’ Louise Ellison. “Not just to a requirement for this sort of finance, but also to the risks climate change is presenting and the pace at which we need to change.
“People are realising that this sort of finance must be approached in a way that is central to business and that it is not optional. It is no longer something you do when you kind of feel like it, or if you have had a good year. It needs to be embedded within finance frameworks.”
Red alert
There are a number of contributing factors fuelling this mass wake-up. One would hope that personal values and a genuine commitment to tackling climate change would be in the mix at the very least for most companies. But there are other catalysts, including regulation, corporate governance and, of course, safeguarding the liquidity of assets.
“Regulation can only take a change so far,” says Cyrus Korat, partner at DRC Savills IM. “Over the past two years the influence of ESG on the commercial aspects of real estate has grown at a quicker pace than anyone was expecting. We see it with regards to liquidity.
“If certain property types are not meeting certain standards, the liquidity is falling away right here, right now. It’s affecting values. It is affecting the conversations that building owners have with their tenants. And now, certain tenants will only occupy buildings of a certain standard.”
It is, of course, good news that change is not only afoot but is being fast-tracked off the back of the growing impact ESG credentials – or lack thereof – can have on businesses and assets. It is also good news that the industry is champing at the bit to secure ESG-friendly finance. But this does create a supply and demand issue – especially in the short term – as there is limited availability of capital in this space.
“There is a massive issue in terms of how we are going to finance this,” says Ellison. “Unless this is addressed thoroughly through finance frameworks then there won’t be enough finance to support the transition. We [Longevity] are increasingly being asked to set up frameworks for green finance so we can really see what constitutes a sustainable project. The question is, how do we start channelling and funnelling investment into projects that are eligible for sustainable finance to make sure the right projects are being targeted?”
And these investment decisions are not as black-and-white as looking at a project, seeing that its ESG credentials stack up as they currently stand and pressing the button on an investment. “A building that isn’t great from an environmental perspective may still be financeable today if there is a plan for it,” says Gregor. “If somebody says ‘here is what I am going to do. I’ll stick to that plan and improve it’, that’s potentially financeable.”
He adds that this is an effective incentive for those building owners which actively want to make a change, but also those who might need a little more persuasion. “The way in which we can influence things is by influencing the owner of the building to make the change. This comes back to having a financing structure that says ‘OK, it’s not great now but if you improve it then the money will be available’. That’s the transition we need to be focusing on.
“We announced a programme where we set a target of getting to £1bn of sustainable transition loans by 2025 and we are most of the way to that target within a year. That is because there are plenty of people who want to get moving, but there are also people who think ‘I want to get out now and make this someone else’s problem’ – and in some cases that might be the right thing anyway. Maybe they are not the right owner for that building.”
Ambitious and robust
For all of those “right owners” out there – the owners that know changes need to be made – Ellison says there is a checklist of things that need to be demonstrated to secure ESG-related finance.
“A building or a business will need to demonstrate it will bring carbon emissions down. Then, whatever is done will need to be ambitious and robust. And it will need to be verified by a third party, because we cannot use this finance in order to keep doing business as usual under the radar. We need to do something really meaningful with this finance because we really are running out of time to create those big shifts.”
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