As the Building Research Establishment reminds us, the built environment is responsible for 40% of carbon emissions in the UK.
As such, this is a logical battleground for the fight against climate change, and on 13 September the Infrastructure and Projects Authority published Transforming Infrastructure Performance: Roadmap to 2030. One of its main aims is to retrofit existing buildings to achieve net-zero greenhouse gas emissions by 2050 through:
- Creating certainty on required performance
– Minimum building energy performance standards across all housing tenures
– Stricter regulations for commercial and industrial buildings
- Providing visible demand
– The public sector pipeline creates the opportunity to pioneer “no-regrets steps towards net zero”
– Integrated whole-building measures
– Collaboration with the supply chain
– Delivery plans required at regional and national level - Supply-side innovation on scalable delivery models
– The supply chain must learn from scalable delivery models in the public pipeline and social housing to feed a second virtuous circle and create investable business cases for private residential and commercial application
– By segmenting building archetypes to provide greater visibility of the potential pipeline and enable increasing use of “kits of parts” and industrialised retrofit solutions, industry could deliver easy wins compared with harder-to-scale bespoke solutions
Developers entering a joint venture with the public sector will, of course, need to navigate the changing landscape of post-Brexit public sector procurement – in particular, any changes following the Cabinet Office’s December 2020 consultation on the Transforming Public Procurement green paper.
Less likely to fail
Publicly backed council investments are far less likely to fail or become insolvent than private investors’ special purpose vehicles (therefore allowing for longer-term planning, including on sustainability). As noted in the Local Government Association’s report Financing Green Ambitions: a Practical Guide for Councils in November 2020: “Typically, local authorities take a different approach to borrowing and will use their overall standing and covenant strength to borrow and fund a programme of activity. The borrowing is secured against the authority rather than against specific projects.”
This approach has, in recent years, provided cheaper overall finance with fewer hurdles to draw down funding than private sector alternatives. Long-term interest rates, which have been made available to local authorities, are similar to senior finance rates. The relatively low interest rates and ease of securing the lending mean that there must be specific reasons that a local authority project would want to consider private sector debt funding. Abundance Investment (the investment platform offering community municipal investments) has also created a useful risk guide, which explains the nuances around buying and selling such investments and their underlying security.
As with all public sector matters, there is also the wider political context to consider. Councils have diversified and massively expanded their commercial property investment portfolios over the past few decades. Some may have acted as a hedge against reducing central government grants and increasing overheads and pension provisions. Others will have seen a regeneration angle associated with an acquisition, and there may have been benefits associated with existing council ownership.
Those investment decisions are now coming under increased scrutiny and demands for greater transparency. It has been widely publicised that 24 councils own commercial property investments (including shopping centres and office blocks) worth twice their core budgets, fuelling concerns about taxpayer exposure should those investments fail. Many developers have been complaining that they have been outbid by councils when seeking to buy such properties, fuelling a suspicion that some councils may have paid over the odds and are then seeking to post-rationalise such investment decisions as a regeneration play; alternatively, that councils have been at an “unfair” advantage in being able to borrow at preferential rates.
Whatever the merits of the original asset purchases, the fact that councils collectively control such large property portfolios does put them in an unprecedented position to “green up” those portfolios to address the climate change and energy agenda that will gain increasing press attention ahead of 2050 – and COP26 in November. This all contributes to a great political desire (in both central and local government) to push this agenda very hard indeed.
Green/climate bonds
The Green Finance Institute has identified the potential of local authority green/climate bonds to fund retrofitting and other green investments in council-owned commercial properties.
Local climate bonds are a type of community municipal investment that allow local authorities to raise capital to fund specific initiatives in their neighbourhoods. Investors can invest from as little as £5 through a crowdfunding model. Abundance calculated that climate bonds could raise as much as £3bn if issued by the 343 local authorities in England.
The need for local authorities to innovate has been exacerbated by the impact of the pandemic on the public balance sheet – faced with a further £9.7bn of Covid-19 cost pressures and income losses estimated for 2020-21.
Local climate bonds help to diversify the authority’s funding base. They are a valuable way to engage constituents in plans for decarbonisation and environmental strategies.
So far, they have been piloted by West Berkshire and Warrington councils in 2019 and 2020, raising £2m (from a reported 800 investors) used to fund projects including solar panels, habitat restoration, tree planting and LED lighting. On 1 July 2021 the government confirmed the issuance of the UK’s first green bond in September 2021, cementing its endorsement of this type of finance for a green recovery. Indeed, these could be seen as flagships for the government’s Build Back Better agenda, which seeks to address investment in infrastructure, skills and innovation.
In terms of who would invest in such bonds, there is growing evidence that investors (institutional and personal) are increasingly motivated by environmental, social and governance factors. Investors are also demanding greater transparency on ESG, so anyone seeking to attract investment for their development project needs to factor this in.
Finally, on the theme of carrot and stick, it is worth noting the potential for tax incentives and penalties. In September 2021, the GFI convened financial organisations in support of an incentive to support housing retrofit. They sent a letter to the chancellor, calling for an energy-adjusted stamp duty land tax to drive demand for energy efficiency works and support the UK’s green home finance market. Given increasing public awareness of climate change, one can see popular support for such a move.
David Smithen is a partner at TLT LLP
