[Urban Chronicles 2.0 #02] Green corporate loans and real estate

Season 2.0 - Special Green Finance and Real Estate

The past few years, capital markets greeted green bonds with open arms, while green loans were under-used according to a study of the firm BWB. In 2018, the market expects to see the emergence of green lending with the interesting potential of complementing green bond influence in the development of environmentally-friendly projects, internationally valued since the Paris Agreement in 2015.   

What are green loans?

Green loans are financial products that allow companies to finance initiatives with environmental benefits. Still at an early stage of development, consistent and standardised frameworks to consider loans as “green” are currently still missing on the market. The recent issuance of the eagerly-awaited Green Loan Principles (21st of March 2018) by the Loan Market Association (LMA) and the Asian Pacific Loan Market Association (APLMA) is a great promise to improve the integrity of “green labelled lending”.

As a complementary instrument to green bonds, green loans offer companies a large potential to support environmentally sustainable projects in various industries. According to the Green Loans Principles, loans are defined as “green” if they “exclusively finance or re-finance, in whole or in part, new and/or existing eligible Green Projects”. Eligible Green Projects both for Green Loans and Green Bonds are listed by the International Capital Market Association (ICMA) sharing the same indicative categories of eligibility, such as the production and transmission of renewable energy, the conservation of biodiversity, or the adaptation to climate change.

The first corporate green loan was established in 2014 by Sainsbury’s, the British supermarket chain. The £200 million green loan demonstrates the commitment of the retailer to carbon reduction and sustainable projects. In February 2017, BBVA bank made history when signing with the Spanish utility Iberdrola a bilateral green loan. The transaction was the first of its kind in the energy sector worldwide, and the amount – €500 billion– was the highest ever recorded.  

Potential benefits for real estate developers?

As the emitter of nearly half of the CO2 emissions, the real estate industry needs to change its behaviour. Obviously, banks have an integral role to play leading lenders in real estate to offer loan schemes with an environmentally-friendly purpose. Potential of energy efficient property investments is double, allowing on the one hand project developers to access capital, and on the other hand banks to receive returns on their investments.

The Lloyds’ Green Lending Initiative provides margin reductions of up to 20 basis points on loans that finance energy-efficient schemes. For instance, Lloyds Banks wrote in 2017 a £61 million loan for a Birmingham office building whose energy scheme intended to switch to 100 percent renewable energy sources.

What possibilities for 2018?

The global forecasts expect 2018 to be a transformational year for the green loan market, targeting to access the same maturity level as the Green Bond market. The recent publishing on the 21st of March 2018 of the Green Loan Principles is expected to produce over 2018 an all-new dynamic with an increasing demand from investors and a desire by financial regulators to promote green lending. 

Further collaboration between the real estate and banking industries is still needed to develop harmonised metrics, terminology and standards that might help products and services becoming mainstream. For example, the Better Building Partnership (BPP) in the UK or the EeMAP (Energy Efficiency Mortgage Action Plan) project across the EU are currently exploring the commercial and reputational gains of green lending to improve sustainability and create positive change in the real estate field.

As a new tool to fight global climate change, one of today’s greatest challenges, green loan is a win-win product for real estate developers and banks alike. Defining the rules of the game in this emerging market is still in progress in the UK and in France, consolidating their image of top-ranking international hubs of green finance.

For more information on Green Soluce and our services regarding green finance & real estate, please do not hesitate to contact us.