The bank’s recently launched £1 billion lending commitment for commercial real estate investors has been set up to reduce carbon emissions from buildings. To incentivise its clients’ adoption of energy efficiency measures, Lloyds Bank offers a discount of up to 20 basis points on loans over £10m. Trucost created an assessment tool to assess initial eligibility for the green loan and identify appropriate energy or carbon savings targets that borrowers must meet to receive the discount.
For real estate companies keen to improve the environmental performance of buildings, the discount helps by attaching a financial benefit to improvement works, raising energy management up the agenda. Grant Vaughan, Director of Corporate Capital Debt Markets at Lloyds Bank Commercial Banking, said that the bank also benefits by gaining insight into the credit worthiness of clients by further examining the underlying assets.
Real estate investor Trinova was the first to take up the offer, borrowing £17m to maintain the ‘Excellent’ rating of Vulcan House in Sheffield, South Yorkshire, under the BREEAM building sustainability assessment.
As the building is occupied by a UK government department, it’s very important for us that we maintain the environmental credentials of the building. To have a bank that is supportive of that, and is very much pushing the agenda, gives us a lot of comfort, said Edmund Costello, Partner at Trinova. Everyone from Lloyds Bank, the manager and the occupier are very much on the same page and working towards the same agenda, he added. Mr Costello said Trinova was interested in applying for a further green loan from Lloyds Bank.
In September, HPH Commercial Property became the second company to benefit from Lloyd Bank’s Green Lending Initiative when it received £14m to invest in further improving the energy efficiency of buildings in its portfolio.
Caroline Hill, Head of Sustainability at commercial property and investment company Land Securities, said collaborating with occupiers to improve energy efficiency was very important. Land Securities develops bespoke energy reduction plans for each of its properties that contain a mixture of measures including capital expenditure on building improvements and behavioural programs with tenants, such as to better manage waste. In her experience, tenants welcomed a proactive landlord.
Louise Ellison, Head of Sustainability at retail property owner-manager Hammerson, agreed and described how the company created an agreement with coffee retailer Costa over sharing the costs of capital expenditure to improve premises it occupied in return for a share of the savings. Conversations with other attendees at the event revealed this is not an isolated example of how landlords and occupiers are collaborating to share in the costs and benefits of green building improvements.
Energy efficiency is often a low priority for occupiers when selecting new premises, said Rebecca Pearce, Head of Sustainability at commercial real estate services and investment firm CBRE. Rather than relying on Energy Performance Certificates as an indicator of sustainability, she advised landlords to talk in business terms about the financial savings from reducing total occupancy costs and the benefits of better quality working space to enhance health and wellbeing, appealing to their desire to enhance productivity and attract and retain employees. She also noted that, following conversations between property managers and occupiers, jointly reducing energy consumption can deliver great results.
Natural capital – the business case for going green
One way to communicate sustainability in business terms is to use natural capital accounting – a way of calculating the financial cost of environmental damage, for example, from the health costs associated with pollution or the direct business costs of a loss of resource. Trucost, which was recently acquired by S&P Dow Jones Indices, has been a pioneer of natural capital accounting for the past 16 years.
In partnership with construction company Sir Alfred McAlpine, Hammerson asked Trucost to weigh up the natural capital costs and benefits of three energy efficient technologies on two different development schemes: solar panels and LED lighting at Southampton’s WestQuay Watermark shopping centre, and gas fired, combined heat and power (CHP) at London’s Brent Cross Cricklewood regeneration scheme. The results have improved understanding of the wider financial benefits and costs of different technologies, leading to more informed, smarter decision making.
Hammerson’s Louise Ellison said natural capital is a very interesting way of feeding in to the decision making around technologies because you get a much clearer understanding of the impacts of one scheme compared to another. For a long time businesses have treated the services nature provides as ‘free’. This clearly cannot continue. Land Securities’ Caroline Hill added that natural capital accounting is something that all industries would have to grapple with.
Hammerson and Land Securities also understand the need for science-based targets to reduce carbon emissions. These are targets informed by climate science on the emissions reductions needed to limit global warming to two degrees centigrade. For example, Caroline Hill said Land Securities has set a new science-based target to reduce its carbon intensity by 40% by 2030 from a 2013/14 baseline, putting it on a pathway to achieve an 80% reduction by 2050, mirroring the UK government’s target in the Climate Change Act.
An evolving green market
All the speakers agreed on the benefits of sustainability, although they admitted it can be hard to quantify them as many are intangible such as attracting and retaining clients and employees. Tatiana Bosteels, Director Responsibility and Head of Responsible Property Investment at Hermes Investment Management, said there are so many factors that drive business performance that it hard to isolate the green aspect. She emphasized that sustainability must be integrated into the business, not treated as an add on.
Andrew Voysey, Director, Finance Sector Platforms, Cambridge Institute for Sustainability Leadership and Academic Visitor for the Bank of England, said that, in the past, mainstream investors had been largely ambivalent to sustainability issues. But this was changing in part due to the recognition by central bankers that climate change was a risk to financial stability.
Mr Voysey gave the example of the Dutch central bank which has assessed the exposure of the financial sector to climate risks. One of the findings was that 43% of assets were in buildings that had poor energy efficiency, exposing investors to energy price and carbon regulation risks.
The outcome could be a combination of carrot and stick with regulators requiring banks and investors to disclose far more information about their exposure to environmental risks, while also looking at what regulators can do to encourage more capital into green projects.
The green property investment opportunity
Ivan Rodriguez, Sustainability Director at Bridges Ventures, said impact investing – where asset owners invest capital in order to an achieve positive environmental or social change as well as a financial return – was a growing trend which had started to become mainstream with BlackRock and JP Morgan entering the market.
Louise Ellison shared her experience of greater engagement with the socially responsible investment (SRI) community leading to enhanced funding streams.
The potential of green bonds as a source of finance for improving the environmental performance of buildings was also discussed. Both Louise Ellison and Caroline Hill were sceptical because of the limits on use of proceeds that apply to green bonds. Moreover, the amount of finance required for green building projects was small compared to the large green bonds issued so far.
However, the market continues to boom with green labelled issuance topping $50 billion by September 2016, almost five times the 2013 issuance of $11bn. Investors need to have confidence that green bonds will deliver the positive climate or broader environmental benefits they promise. Marie-Aude Vialle, Director, S&P Global Ratings, said green bond issuers were increasingly having their environmental benefits certified in order to be competitive and that this was a welcome move.
Richard MacDowel, Relationship Director for Lloyds Bank Commercial Real Estate, said that loans offered greater flexibility as the money could be spent on general working capital and not tied to a specific project. Performance is also measured across the business rather than for specific projects. Moreover, with a revolving credit facility, a borrower could decide how much they needed and pay only for that amount.
Accelerating the transition
To achieve the Paris Agreement’s commitment to prevent global temperature increases exceeding 2°C and reduce the risks of climate change, the transition to greener buildings is essential. Around one degree of this rise has happened already and carbon emissions have not yet peaked, underlying the urgency of the situation. Buildings are responsible for about 40% of worldwide energy use and a third of all carbon emissions. The good news is that building energy use can be cut by 30-80% using commercially available technologies.
The challenge is to achieve rapid deployment of these technologies. For investors and banks, there is a clear opportunity to finance the transition by creating attractive solutions that meet the needs of the market. For property owners and developers, there are opportunities to gain a competitive advantage by capitalizing on green finance, engaging clients and tenants on green property, and setting ambitious targets to manage performance.