We are finally seeing the world come to terms with the climate crisis, and the idea that to protect life on this planet we must meet net zero emissions by 2050. With COP26 now around the corner, leaders from the business and government world are very focused on setting ambitious climate commitments and targets to help make this happen, as well as bringing in financial institutions to discuss how we actually finance these projects.
From the developer and project owner side, there is clearly appetite for building green, but there continues to be a concern in the market of how to implement it, and more important, how to finance these improvements and developments.
The good news? Investors are interested in financing green buildings. It is a compelling asset class and a growing investment opportunity across the globe.
Today’s buildings generate 28 percent of energy-related greenhouse gas emissions and consume 40 percent of electricity globally, contributing significantly to the climate challenge ahead of us. This creates a significant opportunity for green investments. IFC has calculated that there is a $24.7 trillion investment opportunity in emerging markets alone by 2030 in green buildings.
Over the next few weeks, we will be sharing insights directly from different financial institutions on the challenges with sustainable construction and the opportunities for projects to get financed.
Before understanding what criteria projects need to meet to get financed, we first need to understand why things have been difficult to date. One of the biggest barriers in financing green real estate isn’t the actual financing, but the lack of education around green buildings across the value chain.
Developers, investors, tenants, and the broader public, still do not understand green buildings and how to make them happen. This presents a unique challenge as it creates uncertainty across all parties on what qualifies as green and how to implement it, particularly at scale.
It starts with the developers and owners of buildings. There is still confusion and lack of clarity on the business case for building green. Many around the world still think there is a very high incremental cost and are unclear on the tangible business benefits. There is also a lack of capacity in implementing green building technology. Many developers do not have the experience or access to the skills required to build or retrofit green buildings. For those that do, they often don’t have the knowledge or understanding of the green finance market, and don’t know what financial options are available and how to access better financial terms with green buildings.
Many of these challenges are reflected in the investor community too. Many investors are lacking the information and knowledge that green building investments lead to lower default rates and don’t fully understand the business case for green building portfolios themselves. For those that do, there is another challenge in how to identify what classifies a green building and match potential projects to the financial terms and requirements as defined by the financial institution.
Even from the side of the end user, whether that is the tenant or the general public, awareness of the benefits of green buildings remains very low. When the end user isn’t aware of green buildings. Green buildings bring utility savings, making a very compelling case for the end user, but if users don’t know this, they can’t demand it from their landlords. And when there is low demand, there is lower incentive for developers and owners to invest in this area.
All of these factors create a vicious circle, as shown in the infographic below.
So how do we solve these challenges? Stay tuned for our series on finance for green buildings to find out!
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