Ché Wall

24 July 2014 — According to Ché Wall, director of Flux consultants, the potential of green bonds for property is a game changer, particularly in Australia.

Key was the value proposition on offer that tapped institutional debt markets and its fast growing appetites for climate-friendly products.

“There’s been so much good work done in the property sector in terms of new buildings. It’s been transformational when you realise where the market was 10 years ago,” Wall told The Fifth Estate.

“The problem is there’s been no real linkages to how you cascade that transformation to the finance side.”

The closest the industry has come to this is the work on the capital value of the green buildings, such as by academic Professor Nils Kok and IPD’s Australia Green Property Index, now being rolled out globally.

But these all measure the equity markets.

Almost completely untapped has been the debt markets.

Pre-GFC, Wall says, Australia had the most securitised market in the world in terms of debt in its building stock.

If a mechanism could be provided to link that to low carbon property it “all starts to reinforce each other”.

“There are huge opportunities,” he says.

But how big is that appetite? Right now it’s estimated at US$150 billion, but Wall says that if you remove “your property-centric view the picture looks bigger”.

“If you look at it from the point of view of big institutional investors, you’re gaining funds every month and you’ve got to invest them somewhere,” he says.

“In the past there was no mechanism to screen investments on the debt side between a green offer and non-green offer.

“We think of investment as purely equity but there is a huge market in debt.

“There is a lot of money flowing around,” Wall says, in particular on behalf of “large investors that want reduced environmental impact”.

What’s been lacking, he says, is the development of screening and transparency tools.

As lead author of the Climate Bonds Green Property Technical Working Group, Wall has been involved in years of work to find a solution, that has just come back from feedback and submitted to the Climate Bond Standards Board for confirmation within weeks.

The standard includes that buildings must be in the top 15 per cent in any one market, in terms of relative emissions performance.

The bonds would give owners of low-carbon buildings access to a cheaper source of capital, which would create a market incentive for existing and new buildings to become as efficient as possible.

“Think about the paradigm of the property sector that assigns value to green buildings and getting others to pay more for them, and combine that with the huge appetite of institutional investors for investments that meet their needs,” Wall says.

Australia is particularly well placed to take advantage of this market, he says.

“We’ve got two ends of the spectrum. One is investor appetite – where the money is coming from – and the other is the supply of product, which is low carbon.

“We have the discipline of measuring our impact, so we already have the baseline data.”

This is due to the prevalence of the NABERS energy ratings in the commercial property industry, which have done a “great job” along with Green Star in transforming the industry, he says.

What is particularly interesting, Wall says, is how the industry can look at the “changing value of low carbon assets”.

Buildings that qualify under the Standard

The proposed Climate Bond Standard for Green Buildings covers three different types of assets pools according to the Climate Bonds Initiative:

Commercial buildings: Bonds can be issued against the whole value of a commercial building, or a portfolio of commercial buildings. The buildings must be in the top 15 per cent in any one market, in terms of relative emissions performance. The “hurdle rate” ratchets down (meaning the buildings must perform at higher levels) until 2050, when buildings are expected to be net zero carbon.

Property portfolio owners planning to upgrade can also get certification as long as they report on improvements each year.

Green building ratings schemes can be used as proxies for eligibility wherever possible. For example, a LEED Certified building that achieves the 30 per cent energy efficiency design goal relative to ASHRAE 90.1, as used in LEED v2009, would meet Climate Bonds Green Property criteria and be eligible for a certified climate bond. Wall says tools such as Green Star in Australia, while in its current version not able to be used, could build in similar metrics so to align with the standards. The standards, he says, are designed to be “extremely complementary” with building rating tools.

Residential buildings: In the residential sector good building codes will be able to be used as proxies for the 15 per cent hurdle rate. Home mortgages for buildings in the higher levels of current rating systems, such as the “Code for Sustainable Homes Level 6 in the UK”, Energy Commission Title 24 Building code in California and the BASIX tool in Australia, will qualify.

Upgrade finance (such as environmental upgrade agreement finance): Building improvements that achieve emission reductions of 30-50 per cent from a baseline would comply, for example LED lighting schemes.