December 21st, 2021
According to a recent report by GRESB, (Global ESG Benchmark for Real Estate Assets) a growing number of the UK’s private and listed CRE companies are participating in voluntary ESG and climate-related disclosures. We have also witnessed wide-ranging levels of public commitment to Net Zero compliance by 2050 at corporate level, portfolio level and at individual asset level. The BBP’s (Better Buildings Partnership) Climate Commitment Group has enjoined 26 of the world’s largest real estate companies, representing c. £240bn AUM, who have committed to Net Zero pathways prior to COP26.
Equally, international credit markets have experienced a boom in sustainability-linked loans and green finance, however, the CRE sector attracted a trivial 12% of these loans in 2020 in the form of direct disbursements and even lower proportions in previous years.
A combination of factors is responsible for this lack lustre availability of sustainability-linked financing facilities for the real estate sector including a lack of clear policy guidelines and a lack of clarity about what constitutes “green” – both of which lead to weak market signals.
On the supply side, there is a lack of wide-spread availability of green finance that adequately underwrites and rewards sustainability at each stage of a development’s value chain by using forward-looking KPIs. For supply of finance to grow at scale and at pace, the real estate sector must adopt standardised, science-based, whole life carbon (and CO2 equivalent) mitigation methodologies that can be readily applied by lenders and that can also form the basis of green CRE bond issuance for large-scale, public/ private sector emissions mitigation projects such as decarbonised district heating systems.
On the demand side, there is a growing recognition of risks associated with stranded assets. Unfortunately, the lack of widely available finance that sufficiently incentivises complex retrofits is moving major asset owners towards divestments to meet their carbon budgets and Net Zero commitments.
Where capital is available to fund retrofits, guidelines that clearly target carbon reduction levels rather than EPC ratings are essential to avoid locking in sub-optimal upgrades. Using EPCs to evaluate building performance is fraught with risks due to the poor visibility of in-use emissions and requires more real time measurement.
The uptake of finance for deep retrofits is inevitably reliant on green supply chains that avail cost and scale efficiencies. A report by MSCI Climatanalytics estimated a 2.5%-3.5% decline in building valuations due to capital expenditure required to address climate-related risks. Policies that support the growth of green supply chains are crucial for reducing cost per unit of CO2e (carbon dioxide equivalent).
Finally, to spur supply-side innovation in climate-related fintech it is important that we invest in digitising our built environment. At Amro Partners, our strategy is centred on digitisation and decarbonisation. Investments in our technology stack play a key role in the delivery of our Net Zero commitment. Inevitably, the sector’s adoption of smart building technology will impact our ability to link finance to occupier and owner behaviour. An example for the residential sector is green mortgage finance linked to ‘smart’ homes. Currently, green mortgages form a small proportion of overall lending to the residential sector and those available are linked to EPC A and B ratings. This not only limits the supply of green mortgages to a small proportion of c. 1% of qualifying homes but it also detracts from long term carbon mitigation by failing to continually measure in-use emissions. In its 6th carbon budget plan, the Climate Change Committee estimated a net cost of c.£260bn to finance deep retrofits of the UK’s standing stock of homes. The expenditure ought to be perceived as a significant opportunity for green finance innovation that can drive demand carbon reduction.
Authored by Ami Kotecha, Co-Founder and Head of Venture Investments at Amro Partners, this article was published in The Cambridge University Land Society Magazine 2021.
December 17th, 2021