With projects around the world aiming for ever increasing levels of sustainability often through the adoption of new technologies, it’s no surprise that project finance is increasingly going green too.
Too often the earlier adopters of technology that incorporate new sustainable materials and/or construction practices in their projects, have found it difficult to access funding due to the perceived higher risk of not applying a ‘mainstream’ approach. Someone has to be the first to take on the risk and demonstrate the benefits of the technology to bring it into the mainstream. This is where funding that is specifically intended for projects that demonstrate benefits for the environment or tackling climate change, could provide a springboard for these type of sustainable technologies.
Green funding isn't exactly new. The European Investment Bank launched the first such instrument with its ‘Climate Awareness Bond’ in 2007. Sustainability is now an important strategic priority for many organisations and green bonds are becoming increasingly popular for funding environmentally friendly projects.
For green bonds to have validity in the marketplace, they need to abide by the Green Bond Principles guided by the International Capital Market Association (ICMA), though adoption of the principles is not yet mandatory.
The Climate Bonds Standard is a screening tool for investors and governments that has been created by the Climate Bonds Initiative, an international not for profit organisation that promotes investment in low carbon, climate friendly projects. Projects that satisfy prescribed criteria are eligible to obtain funding from green bond issuers.
In the real estate and construction sector, the primary focus for funding has been low carbon buildings, with a secondary focus on energy efficiency through adopting technology such as LED lighting and insulation. Cities are huge greenhouse gas contributors and a large portion of this comes from buildings. As such, improving the sustainability of buildings offers one of the biggest opportunities to reduce our carbon footprint.
The ANZ’s ‘Green Property & Renewables Bond’ was the world’s first bond to be certified under the Low Carbon Buildings criteria of the Climate Bonds Standards. ANZ issued the bonds in May 2015, with an inaugural $600 million offer that was well oversubscribed. The proceeds were used to finance green properties (40 per cent), with the balance applied to wind and solar energy loans. Projects that benefited from the bond proceeds included wind farms in Taiwan and Australia and Brookfield Place Tower — a six-star low-carbon building in Perth.
The Low Carbon Buildings criteria sets out which property assets are eligible for certification and lists three types of assets which qualify for bond proceeds:
- Commercial buildings — where the building is targeted to be in the top 15 percent of their city in terms of emissions performance.
- Residential buildings — where local building codes, energy rating and energy labelling schemes are leveraged as proxies to assess if they are in the top 15 percent for emissions performance.
- Upgrade projects — where improvements achieve emission reductions of 30 to 50 per cent.
Other Australian organisations to jump on board with green bonds have included the likes of CBA, NAB, Westpac, Stockland and Queensland Treasury Corporation to name a few.
Green bonds are undoubtedly a fast-growing market with the number of issues increasing significantly in recent years, particularly now China has jumped on board. Credit rating agency - Moody’s reports that globally Green Bonds of $US93Billion were issued in 2016, up from the $42Billion in 2015 and $11Billion in 2013. Current figures show there is no sign of this growth slowing.
As the concept of green funding evolves we are seeing more products emerge and different funding classes. It may take the form of simple project finance for a green project, the fixed income instruments we know as ‘green bonds’ that are issued with for the purpose of funding sustainable projects or properties, mortgage back securities that tie to compliant ‘green’ assets and the emergence of green digital finance.
Globally, investors are keen to satisfy their social responsibility requirements and investing in green bonds can demonstrate this. Developers that operate in the low carbon building arena, the early adopters of sustainable technology, or simply those making energy efficient refurbishments to pre-existing buildings — should become familiar with green bonds and consider them as a possible source of future project finance if they are willing to comply with the transparency requirements and up front compliance hurdles.
Like any financing option, projects seeking finance need to be able to demonstrate the financial viability of the project, but with green funding there is the additional challenge of ensuring compliance with the Green Bond Principles.
To read more articles in our series exploring the impact of technology on the real estate and construction industry click below.