Last year was monumental for sustainable finance. Some $700bn of green, social and sustainable bonds were issued in 2020, nearly doubling 2019’s $358bn, according to the Climate Bonds Initiative. These instruments are re-aligning both lenders’ and borrowers’ priorities across industries, funding projects focused on sustainability in some form.
Property is no different. In recent years, the industry has seen an explosion of green debt. Hammerson completed a €700m sustainability-linked bond in May around the same time that French developer Gecina converted all of its outstanding debt – €5.6bn – into green bonds.
Banks have also jumped into the fray, with Derwent London securing a £450m green revolving facility in 2019 from HSBC, Barclays and NatWest. Non-bank lenders are similarly keener than ever. ICG Real Estate, for example, agreed its first green senior loan in May 2021: an £86.8m facility secured against Tristan Capital’s Reading International Business Park.
As ESG concerns move up the corporate agenda, what impact are these loans having on companies’ strategies – and, more importantly, can they deliver the green development they promise?
Borrowers benefit – as long as they deliver
For borrowers, green debt can often deliver favourable margins. Earlier this year, LondonMetric refinanced its debt partly with a £380m private debt placement that included a £50m green tranche. That 15-year tranche had a coupon of 2.43%, two basis points lower than an equivalent non-green 15-year tranche.
In its loan to Tristan Capital, ICG offered a discount to the margin (undisclosed but understood to be in the ballpark of 5%) if the company hits certain targets in its refurbishment of the business park, including improvements to its energy performance.
If borrowers get a better deal – lower margins – for going green, why are lenders happy to offer those incentives? From a purely financial point of view, it’s a combination of catering to demand – property companies have corporate net zero targets they have to meet – and keeping their own shareholders happy.
David Mortimer, head of senior debt at ICG, says: “Funds, listed companies and private equity investors all have their own shareholders and investor groups who are itching to see people make progress on sustainability issues, on climate change and on ESG matters more widely, and the same is true of lenders.”
The other factor, Mortimer adds, is a general growing awareness of the basic importance of ESG and climate issues.
Attractive lending margins do come with strings attached, however. Hammerson, for example, has two targets it has to meet: achieve a 60% reduction in carbon emissions within assets under its operational control and achieve a 50% reduction in carbon emissions from brands in its managed portfolio by 2025.
If Hammerson fails to achieve these, it will result in a 75bp penalty (37.5bps per target) in the final year before the bond matures.
Does green lending create greener developments?
What green lending can achieve varies from one developer to another. In LondonMetric and Hammerson’s case, refinancing their debt was not as much about unlocking new green developments as it was about reinforcing existing priorities and playing a role in reshaping the wider market.
“The sustainability linked bond does not specifically enable Hammerson to do something it wouldn’t already do,” says Himanshu Raja, CFO at Hammerson, “but it is a continuation of ingraining sustainability into everything we do.”
The company has a target to be net positive by 2030 and has already kickstarted several projects to get there, including investing £6m into solar panel installations and introducing smart metering systems.
Martin McGann, CFO of LondonMetric, similarly says: “ESG work is embedded in our strategy. However, this better aligns our debt investors with our equity shareholders and other stakeholders.”
McGann adds that he believes that there will be “far fewer” debt issuances without a green framework in the future, which means that, ultimately, an absence of green credentials will make raising debt more difficult.
But in ICG’s case, Mortimer says the lender wanted to see Tristan Capital do something it otherwise wouldn’t, setting its green targets to reflect that. “What we wanted to make sure was that the targets were stretching, in that they’re not things that would have been achieved anyway in the ordinary course of events, because that would just reduce our economics for no actual additional enhancement.”
Targets, Mortimer adds, should be achievable but ambitious enough to incentivise a borrower to reach higher standards than they otherwise would have done.
In a similar way, at the end of 2020 Aviva announced its commitment to lend £1bn of “climate transition” loans to real estate by 2025, focusing on the impact to borrowers.
At the time of the announcement, Gregor Bamert, head of real estate debt at Aviva, said: “We believe that by directly linking long-term financial incentives to measurable improvements in the environmental performance of the buildings we lend against, we can incentivise and engage borrowers to consider sustainability factors in a more meaningful way.”
What about standards?
In recent years a number of often overlapping standards have arisen to ensure that green lending does delivers on its promises. Some of the biggest listed players, such as Landsec, have created green bond frameworks that are aligned with Climate Bond Initiative Standards and the International Capital Markets Association’s Green Bond Principles.
A major part of the CBI Standards is its certification scheme, which aims to give the bond market assurance that the bonds they invest in deliver on their sustainability promises and disclose relevant information.
GBP guidelines set out voluntary frameworks for issuing green bonds. They set out advice on appropriate ways to use green bonds along with ways to to manage proceeds and report results.
Some companies issue bonds that do not meet GBP guidelines but are aligned with the UN’s Sustainable Development Goals – 17 global targets to lead to a more sustainable future. These are not technically green bonds but might deliver certain sustainable activities.
Meanwhile, some lenders, such as Aviva, have based their green lending frameworks on the UN’s SDGs. Given the overlap between various standards, companies will often state that a debt instrument aligns with GBP, SDGs and other frameworks like the EU’s Sustainable Financial Disclosure Regulations that came into force this year.
Complicated as it is now, continued standardisation will have to play a role in giving lending markets confidence in green loans. After all, being seen to take sustainability seriously is not the same as delivering it, and as more green loans are issued, developers will have to prove they have an impact. That’s where the real work starts.