Payment Policy
The financial barriers to green real estate can be overcome, explains Lisa Michelle Galley.
Community officials, property owners and citizens are changing the world — working hard to extend regional social, environmental and commercial vitality. This is driving exponential growth in energy efficient and environmentally- certified (collectively called ‘green’) buildings, since some people realise that green buildings are clearly better performing investments that release funds trapped in wasted resources back into the pockets of workers and the local economy.
Yet, green building opportunities present major challenges for today’s financial sector. In Living Cities (2009), a collaborative of 21 global financial institutions, cities named a lack of funding as their number one challenge for developing large-scale green building programmes. Commercial banks have difficulty with pricing energy savings as an asset. Investors are still getting comfortable with factoring water and energy performance into property pricing decisions.
To address these barriers, governments and private investors are combining green financial products with traditional ones, into systems of finance products and mechanisms, to introduce transparency about building performance into markets, and direct capital into and from green buildings.
These new financial solutions, organised at the district or community level, are implemented via public-private collaborations. Implementing these programmes requires moving through a series of nested considerations from determining the interests of diverse stakeholders to structuring the right finance mechanisms for communities, investors and for reducing consumers’ greenhouse gas emissions through day-to-day activities. Understand the Interests of Financing green starts with understanding the real, often unspoken expectations of each stakeholder. Property investors need clear green investment cases. Homebuyers seek to reduce their energy costs and ensure safe air quality for their children. City officials want to limit resource expenditure on public infrastructure. Incorporating these expectations into any green finance assessment promises crucial insights. Participants can increase the impact of initiatives, since finance options are simultaneously compared to everyone’s interests and available opportunities. They also provide an early warning system about potential roadblocks, saving the time and money associated with creating financial solutions which were doomed from the start.
New Tools for Green Finance
Accelerating green buildings requires that communities and investors obtain capital for their projects. Below are a few new, popular and innovative green finance products that assist with both individual projects and large-scale transformation. Green bonds: Socially responsible and ethical investors are a potent source of capital, but have traditionally shied away from investing in real estate, since it does not clearly align with their mission requirements. However, as a US$2.71 tril market ‘on a mission’, socially responsible investors (SRI) are increasingly stepping up to partner with communities by buying green bonds issued by local governments that fund large-scale retrofitting of low income housing or regeneration of blighted urban areas. Recent examples include the EU-issued EUR1 bil in ‘Climate Awareness Bonds’ in 2007. In the United States, bonds for ‘tax-lien’ financing, such as those issued by Sonoma County in spring 2009 and the upcoming San Francisco Sustainable Finance programme are growing in popularity, with more than 95 Californian cities either operating or in the process of establishing similar programmes.
Commercial bank green loans and investment products: When a municipality implements sustainability initatives, the continued access of businesses and consumers to credit services is often taken for granted. However, this as well as an adaptation of those products to better fit with the municipality’s sustainabilty objectives for buildings, is a critical area of analysis which often goes overlooked. As a result, many communities watch as sustainability initiatives falter, since they do not see sufficient private market credit and investment taking place. Often times, they fail to understand exactly how much credit for buildings actually comes from local banks. When the South Korean government announced a national ‘low carbon, green growth initiative’, several of the nation’s largest lenders, including Kookmin Bank, also announced their rollout of many types of green financial services and products. The products not only cover residential and commercial green building loans, but also extend to industry with asset management, project finance and insurance.
Climate Benefiting Finance: Some communities and investors are even requesting green finance solutions that are sophisticated and scalable enough to transform the national economy. Introduced in June 2009 by the winning ‘c_life’ team in Sitra’s Low2No competition in Helsinki, Finland, climate benefitting finance is a replicable set of economic frameworks that will help to assure a private finance market that values green buildings. The frameworks consist of many interrelated systems of green financing mechanisms, all designed to price and deliver finance in a way that rewards carbon savings within businesses, real estate projects and the carbon-related behaviour of private individuals. Here, the goal is to use finance to ignite profound change and diffuse new ways of thinking about sustainability.
Designing Green Finance Mechanisms for Impact
Molding green and traditional finance products together into a customised programme sets the stage for finance that is truly aligned with driving sustainability. First, stakeholders jointly analyse their situations and cross-educate each other about their individual risks of continuing business- as-usual. Second, the government will comprehensively assess the availability of incentives available to the building owner, to understand which ones most closely complement their objectives and those that conflict. Third, the intiatives’ attractiveness to private sector capital sources will be researched. Fourth, they will focus on needed partnerships with private financial institutions to assist the development of the loan products, that work best with programme funds that public agencies may provide for green buildings.
From those evaluations, officials, investors, financial institutions and citizens can obtain a common understanding not only of their individual green business case, but also of the interrelationship of their success within the green initiative and the success of others.
Market-tailored tools such as investment and credit underwriting protocols for green buildings, benchmarking and metrics to measure property performance, as well as new monitoring and reporting regimes to assure feedback, will strengthen the initiatives’ success.
The gains of incorporating green finance mechanisms into sustainability initiatives are transparency and clarity. When everyone at the table is able to actively benefit, barriers fall and the complex dialogue becomes much clearer and simpler.
Lisa Michelle Galley is Managing Principal of Galley Eco Capital, a San Francisco-based green financing consultancy.
