Green finance is one of the biggest ways to help speed the transition to net zero in the built environment.

The growth in green finance comes as investors and lenders commit to playing their part in the transition to net zero. They recognise that green buildings increasingly represent a better and safer investment, with initiatives by organisations such as the Task Force on Climate-Related Financial Disclosures (TCFD) encouraging the global financial community to appreciate the disastrous effects of climate change and the paramount need to seek out green investment opportunities.

Even more importantly, the potential reward and opportunities are huge, with the International Finance Corporation (IFC) calculating that there is a $24.7 trillion investment opportunity for green buildings in emerging markets alone by 2030.

So how do we get more money into the sector?

In our previous blog, we looked at the typical challenges investors face when trying to lend into the green building market. Today, we will delve into what criteria and considerations investors take when evaluating opportunities.  

Investors and lenders are now committing to greener investments at a pace. There is a growing tendency for financiers to seek out investments that account for climate risk and back projects that can make a proven contribution to reducing impact. Why? Because of the growing risk associated with investments.

“When you build in climate risk, we believe green assets have a lower default rate and are more resilient, particularly during a downturn” said Tracey Harris Wong, Head of Sustainable Finance at Standard Chartered Bank at a recent Sintali webinar on green finance.

Her words were echoed by David Willock, Head of ESG Finance at Lloyds Banking Group. “We are now starting to model how our investments in the built environment will perform 10, 20, 30 years from now and more under different climate scenarios” he said.

The message is becoming increasingly clear: unless you address the greening of your building stock you will not be able to access finance in the very near future.

So, what do investors and lenders look for when evaluating a green building project and choosing whether or not to invest?

1. Does the project and company pass due diligence?

Any finance arrangement, loan or investment has to be based, first and foremost, on due diligence and being able to independently prove and verify the performance of a built asset from its design and inception, through its life cycle and eventual end-of-life.

2. Can the green credentials be third-party verified?

The overwhelming message from the finance community time and time again is that independent certification is a vital pre-requisite.

“Third party certification is really important. Increasingly investors need to evidence that the investments they are making are credible.”

David Willock, Head of ESG Finance at Lloyds Banking Group

Using independent certification that is linked to a robust third-party performance standard also means that the data needs of investors will be well catered for. This includes data on the design intent and ambition of a refurbishment or new build project, and gathering much sought-after real-world data on what is actually delivered, with certification milestones employed at each stage of the development.

Financiers are now, in fact, using independent certification to define and set sustainability ambitions and check that a project is delivers on its ambitions. Many are now developing new sustainability linked investment vehicles that require projects to achieve certain targets, whether that be around energy efficiency, water use or another sustainability requirement, over a period time. If targets are met, there are incentives and if they are not, penalties will follow. You can read more about different green finance mechanisms for green buildings here.

3. Is there a long-term vision?

Investors are focusing on the net zero ambitions of a building, with an increasing requirement for owners and developers to show that they are on a journey towards net zero, which is again becoming a pre-requisite. Financiers understand that not all buildings can (or should) be made to be net zero on day one – the level of investment and practical challenges are achieving this would be insurmountable. However, they will want to see that an individual building asset or a portfolio has a clearly identified pathway.

“What is important is the recognition by the financial institutions that we are on a journey to sustainability and net zero” said Valley Kamisani of the International Finance Corporation (IFC), speaking at the Sintali webinar. He says that investors and lenders are looking for a clear strategy and implementable plan for net zero, which is not just a one-off tick box exercise of sustainability at any point in time but represents a clear long-term plan providing the confidence that real progress will be achieved.

Within the drive to net zero, financiers are also placing an ever-greater focus on existing buildings and retrofit, largely through the recognition that existing buildings are the area that needs to be addressed if we are to make any real progress. Whilst they recognise that turning inefficient older buildings into sustainable long-term investments is challenging, for example when dealing with complicated landlord and tenant relationships. However, they are looking for developers and technologies that address the transformation of existing stock. This also then means they will look for sustainability standards and certification that can be applied to both new and existing buildings.

Ultimately, investors and lenders are looking to work with partners who will transform the built environment, and develop global approaches to common challenges based on transparency.

So what do you do?

Investors are sending a clear and strong message that now is the time to act. This is witnessed by the innovative work going on in the financial sector that is aimed at driving down climate emissions, and a willingness to work with partners in the built environment who have implementable ambitions and plans.

In many ways, the groundwork has been done in finance, they now need developers and building owners to actively engage with concrete plans to make the transition to net zero a reality.