The rise and rise of green property bonds

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Green bonds are debt instruments used to finance projects that deliver environmental benefits. Recent years have seen a near-exponential growth of green bond issuance. But what does this trend mean for sustainable real estate projects?

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Green bonds take off

The very first green bond was issued in 2007 – and less than a decade later, yearly issuance reached a whopping USD155.5bn in 2017, as estimated by the Climate Bonds Initiative. Over the past two years more issuers have joined the game, diversifying the market, with the first sovereign green bond and even the first green sukuk, or Islamic bond.

And why not? For an issuer, ‘labelled’ green or climate bonds are a route to additional funding; they attract the growing universe of sustainability-conscious investors. Almost every green bond issued so far has been oversubscribed, including those in the property sector and the vast majority are now investment grade.

Green bonds in property

Across the property world, green bonds are increasingly being used to fund greener buildings and renovation projects. This is proving to be a sure-fire way of reducing costs for tenants, satisfying environmentally-conscious investors, and providing landlords/developers with much-needed project finance. For example, Unibail-Rodamco has used green bonds to finance the creation of “best-in-class” sustainable assets that meet a bunch of pre-conditions such as a BREEAM ‘Very Good’ rating. Other real estate players, such as Foncière des Régions and Fabege, also issued green bonds in recent months.

Meanwhile, Barclays became the first bank in the UK to issue a €500m green bond for financing and refinancing residential mortgages on the most carbon efficient homes in England and Wales.

The pitfalls

While the rapid growth of the green bond market is fantastic news for the sustainability sector, due diligence is required to make sure the change we are seeing is real. When issuing a green bond, the key for the investor is to be sure that the funds raised will only be used for projects that enhance or protect the environment, like renewable power, sustainable agriculture or energy efficient buildings. Public documentation, second party assurance, and alignment with standards such as the voluntary Green Bonds Principles, GRESB Green Bond Guidelines, or the Climate Bonds Initiative Standard, serve to guarantee the authenticity of the project and prevent green washing.

Green bonds are here to stay

The rise in green bonds are an encouraging symptom of the rise in sustainability activity worldwide and are proving to be a useful weapon for private and public organisations looking to combat not just environmental but social concerns, too. Indeed as our tools to measure the impact of such instruments become even more sophisticated, it is likely that the lesser-known cousins of green bonds – the ‘social’ and broader ‘sustainability’ bonds, will grow in popularity as well.

And a good thing too – as the World Bank’s International Finance Corporation has estimated that a staggering USD 23 tn of investment will be needed between 2016 and 2030 to deliver the cuts in carbon emissions envisaged under the Paris climate agreement. Could this small but rapidly growing segment of the investment market step up to the challenge?

Article written by Emilija Emma and edited by Laura Jockers in JLL’s Upstream Sustainability Services team.

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