At the recent COP26 Summit in Glasgow, over 450 of the world’s banks have committed to decarbonising their investments and lending. Led by former Bank of England’s Mark Carney, the commitment was baptised “GFANZ” (the Glasgow Financial Alliance for Net Zero) and includes pledges to report annually on the carbon emissions linked to the projects they lend to. In addition, they also committed to ensuring trillions of dollars of lending goes to green and decarbonising projects – real estate retrofits being a key piece of the puzzle.
WHAT DOES THIS MEAN FOR ASIA-PACIFIC?
With Asia representing 40% of global energy consumption, Asia will be a key player in the transition to a low carbon world. For the Real Estate sector, this will mean articulating, funding and executing a grassroots uplift of the carbon efficiency of our building stock across all property types.
Typically, decarbonising a property requires property operators and owners to move away from carbon intensive energy sources such as natural gas and fuel, to clean energy options - primarily electricity, which can be obtained through low carbon, renewable sources. As such, a fundamental step in the decarbonisation of our properties will be electrifying these assets. This means property owners and operators will be required to invest in new technologies such as heat pumps for heating and learn how to manage these new and likely more complicated building systems.
In addition, decarbonisation requires us to consider a responsible pathway of reducing our carbon footprint. The first step is to consult the carbon hierarchy to avoid unnecessary energy consumption, this might look like ensuring lights are not turned on when occupants aren’t using a space, or that we avoid conditioning an entire building for a small portion of it to be used. The second step of the hierarchy sees us drive energy efficiency (often through controls and technology), a key step that property owners and operators contribute to. This often includes lighting upgrades, HVAC upgrades etc.
However, these activities and this transition will require funding and financing. Energy avoidance, energy efficiency and electrification, particularly in the retrofit of existing building stock is not without an upfront cost. The GFANZ pledge will ensure these changes are feasible.
GREEN FINANCING IN ASIA-PACIFIC
In Australia, the Commonwealth Bank have created a scheme where a percentage of a property’s value can be borrowed at a very low interest rate if it can demonstrate an energy efficiency return, preferably in the form of an uplifted green rating (such as NABERS or LEED).
We are also seeing investors, and increasingly superannuation funds across Asia Pacific, participating in green bonds. A green bond is a fixed-income instrument designed specifically to support and promote climate-related or environmental projects. The World Bank issued the first official green bond in 2009, so this isn’t a new financial instrument, simply one that is now starting to gain more momentum. In Real Estate, we most often see green bonds applied to projects that fund the development of green buildings, building system electrification, energy efficiency upgrades, on-site renewable energy generation, sustainable waste management upgrades, and sustainable water management. Each of these projects have a demonstratable positive financial and sustainability related return. Looking forward, green bonds are increasingly likely to be linked with a decarbonisation pathway and demonstratable improved green metrics of a property asset.
According to Bloomberg, the sustainable debt market in Asia-Pacific is growing with more than $229.2 billion in ESG issuance year-to-date, more than a five-fold increase from its 2016 level. Real Estate represents about 28% of this funding, following power generation (including renewable) investments and bonds.
No doubt, there are huge capital and financing opportunities available for property owners, investors and operators in Asia-Pacific. This market will develop quickly as our industry looks to continue forward on realising a responsible and meaningful decarbonisation journey.