Did you know that debt financiers are increasingly being forced to recognize the crucial importance of sustainable assets for their holdings?
Recent studies show that not only more-desirable loan terms but also lower by-default risks apply for commercial mortgages for sustainable buildings than they do for commercial mortgages for traditional buildings than aren’t green. Sustainable property features translate into lower interest rates and a greater interest-only period for your loans. It’s been shown that the default risk on conduit loans can be reduced by 30% or more for LEED certified or Energy Star labelled properties.
A 2017 study by Issler, Wallace, and Sun Homes in on energy prices for default risk mortgages for the likes of commercial retail and office properties and gauges the effects of energy consumption on a building-by-building level. The authors found that the operating practices and sustainable assets of buildings (or lack thereof) that effected energy output had central consequences for whether a given borrower was able to meet their debt requirements. What this suggests is that price risk and energy efficiency will be central elements in the evaluation of risk assessments for new mortgage loans in the future.
As heat and sea levels as well as public awareness toward global climate crisis continue to rise, the research body and consensus on sustainable energy and building performance is growing significantly as well. But like other sustainable policy reforms, the market faces obstacles. These include lack of transparency among internal players with vested interest, as well as what some describe as an insufficient evidence base. Increased transparency and expanded visibility for relevant research would certainly improve strategies for the allocation of capital among market players. Reliable and expanded data is also increasingly sought by regulators seeking to justify granting energy-efficient borrowers capital relief. We find a prominent example of this, for instance, in the European Commission’s intervention into whether green supporting factors could feasibly result in adjusted capital requirements for banks and their sustainable investors.
This is where so-called “green tagging” comes into the picture. With this progressive strategy, which responds both to increased demand from public policy and momentum from within the market, banks in Europe are looking into the idea of systematically identifying and overhauling how they consider the asset collateral and sustainable components of their loans. Not only should green tagging the assets of banks assist in the exponential growth of sustainable finance, it should also contribute to the ability of entrepreneurs and realtors to develop business models that are more energy efficient. Green tagging will also provide increased access to markets with green bonds and will significantly improve tracking for the performance of green loans.
In 2017, the UN’s Inquiry into the Design of a Sustainable Financial System, an organization committed to shifting the financial system into an inclusive and global green economy, published a study called “Green Tagging: Mobilizing Bank Finance for Energy Efficiency in Real Estate.” The Inquiry’s research surveyed the efforts of ten top European banks to green tag around real estate and energy efficiency. It identified the following five key trends:
1) While safer risk management is an incentive for banks to green tag, entrepreneurs wishing to start green businesses have a greater incentive to green tag;
2): The emissions of gas and energy efficiency are the sustainable attributes most quantified and valued by banks and stakeholders;
3) Even without the support of flawless multi-year data histories, the evident financial benefits alone are enough to motivate most banks to invest their time and energy into green tagging;
4) The argument for proving the link between green tagging and prudent regulations and sustainable factors is strong, since banks are not yet driven to move toward green tagging simply owning the risks inherent in non-green assets, and;
5) Banks are committed to further investigating the financial performance of mortgage portfolios and their correlation with energy performance. The study and the import of its overall findings can be found here: http://unepinquiry.org/publication/green-tagging-mobilising-bank-finance-for-energy-efficiency-in-real-estate/.
Sustainable investments are growing at an irrefutable and critical pace. Crucial debt and equity players in the market are increasingly recognizing and concentrating on the environmental characteristics of their financial assets. By quantifying the performance and financial tracking of sustainable real estate buildings and practices, systematic approaches such as the UN’s Inquiry and the other studies cited above are helping to improve the transparency of the market and are clarifying the risks and viability of the allocation of capital.