Green loans for building retrofits and the rapid growth of green finance and shifting attitudes to sustainability are among the big trends the Commonwealth Bank is seeing in the booming sustainable finance market.
During a panel discussion at the NABERS + CBD conference last week, CBA’s general manager of corporate finance, private equity and ESG, Jane Thomson, said that “green is the new expectation” for lenders in a rapidly growing green loans market.
As part of its green, social and sustainability funding framework, the bank has committed to provide a cumulative total of $70 billion of sustainable finance across the spectrum, including property, by 2030.
The green finance market is booming
The big driver for the growth in green loans over recent years has been demand from tenants, who are pushing the bank’s clients – building owners and developers – to offer more sustainable and energy efficient buildings.
“The green loans sector is just booming, both internationally and within Australia, and the property sector if you think about banks and their balance sheets, property is a significant portion of a bank’s balance sheet,” Ms Thomson said.
“There is a big focus on providing financing support to clients to help them both build new buildings that have efficient energy standards, but also to retrofit and upgrade buildings to improve the sustainability of the buildings.”
“That improves both the operating expenses of buildings, it also improves the sustainability standards of businesses that are tenanting those buildings.”
Retrofits a growing focus for financiers
Traditionally, the first thing that has come to mind when people talk about green loans for buildings has been finance for new developments.
That’s now changing with retrofits taking more of the attention. and the bank has a property upgrade loan to specifically address that, Ms Thomson said.
“We have one where we have a margin free facility for a capex [capital expenditure] portion of the loan that is specifically for the use of upgrading properties to reduce emissions by at least 30 per cent.”
“If you think about the building stock today, a huge amount of it is still going to be in use and standing in 20, 30 years’ time. So a huge focus for us is to support the upgrade of those buildings, not just support the construction of new [buildings].”
The mid-market sector is of growing
Another big shift in the market is that interest in green loans is now rapidly growing in the mid-market commercial property sector, rather than just among institutional investors.
“It’s important to support clients from the mid market right up to the very top of the property spectrum. Because a huge amount of property is actually sitting beyond that institutional space in that mid market space,” Ms Thompson said.
“So we’re trying to find ways to support our clients to upgrade the properties and not just the institutions, which is obviously really important, but it’s also important that we support all our clients on this transition.”
The Clean Energy Finance Corporation’s director of property, Michael Di Russo, told the conference that the green loans market has gone from being mostly an international finance pool to a domestic one as well.
This has opened the eyes of mid-market property investors, who have shifted in their attitudes towards sustainable financing.
“The biggest fundamental shift we’ve really been experiencing is exposure to the mid market in terms of what that means for the rest of Australia, as it relates to asset owners, and what those value drivers are,” Mr Di Russo said.
“The conversation has shifted off from ‘what’s in it for me, or what’s the benefit for me repositioning my asset to meet an energy efficient outcome or high NABERs rating outcome?’ to a ‘why aren’t you doing it or what are the risks by not doing it?’”
Green building considerations are going beyond capex and opex
Returns from longer term operational savings from capital expenditure on sustainability remains a big driver for property investors looking at sustainable finance options.
But with tenant expectations growing and inflation rising, upfront returns from op-ex (operational expenditure) cost savings are now no longer the only consideration.
“The other aspects of the risks of not doing it are your access to tenants, having structural vacancy potentially in your assets if you can’t meet minimum procurement standards for the tenancy market,” Mr Di Russo said.
“We’re entering a really interesting part of the real estate market in terms of where it’s going with inflation and the like. There’s a lot of competition with asset owners, so this goes into the piece of repositioning assets to be more marketable.
“And then the last is flows of capital. Every asset needs access to capital. More and more capital is being aligned to the influence that it’s driving and linking back the [sustainability] risk measures that it’s applying on the assets.”
Then there’s the greenwashing – a big focus for lenders
An area of increasing attention for green finance lenders is the risk of greenwashing.
This is only likely to increase with Australia’s corporate watchdog, the Australian Securities and Investments Commission releasing guidance for investment and super funds making ESG claims in the past week.
ASIC’s information sheet on the topic, which included nine key questions for companies to ask about its ESG claims, came with a clear warning that it is monitoring the market for false claims about sustainability.
Against this backdrop, certification for leading building sustainability and energy ratings frameworks, such as NABERS and the Green Building Council’s Green Star ratings, are likely to play an increasingly important role for lenders in managing their risks.
It provides lenders with the confidence that the buildings are what’s represented, the CBA’s Jane Thomson said.
“I think for all stakeholders, it’s providing a robust foundation for providing the financing and being able to call that financing green or sustainable.”
Packaging up green loans into bonds
Along with helping to manage the risks of greenwashing, building standards are also becoming important for lenders as they package up green loans into green bonds.
The CBA issues its own green bonds, Ms Thomson said so it’s important that the assets underpinning those green bonds and green deposit products are based on robust criteria, and validation.
“NABERS does that for us, because it is well recognised across a number of different sustainability industry bodies. It is really important particularly in the mid market space to have simple frameworks that are easy to implement.
“We can therefore use it to support, for example, inclusion in the bank’s green bonds as well, because it has alignment across a lot of different industry bodies and sustainable finance bodies.”