ESG in real estate finance, part 3: How governance fits in

Lenders argue the often-overlooked G of ESG should be fundamental to all aspects of sustainability.

If the ‘S’ of ESG is challenging for real estate lenders to codify, the ‘G’ is an even harder concept for lenders to address through their activities.

Governance, by definition, is the way organisations are managed at the highest level, and the systems they have in place to do so. From a real estate perspective, the ‘G’ involves such considerations as the reputational risk of leasing a building to the wrong tenant or the detrimental impact of doing business with counterparties that lack diversity.

Although governance is as much a consideration for lenders as it is for other participants in the real estate sector, sources argue it is a difficult concept to bake into a loan agreement. Rather than being seen in isolation, most agree good governance in a lending deal centres on ensuring that the sponsor is also properly set up to deliver on the ‘E’ and the ‘S’.

“A major part of the governance element is implemented in the due diligence of the client by the bank,” says Alexander Piur, head of sustainability at Dutch bank ING’s real estate finance team. “Who are the company’s shareholders? Where are they registered? Is there any negative information on the borrower linked to fraud?”

He adds that, aside from standard know-your-customer checks, it is essential to examine a client’s ESG framework and reporting as part of a “360-degree” view on it. “This analysis could lead to further KPI setting to improve an underperformance of a client, by setting ambitious KPIs in a sustainability-linked transaction,” he says. “For instance, it might mean increased transparency in the procurement process or the selection of sustainable suppliers.”

Good governance

Fuchs: “Both lending parties need to have a governance framework in place, including ESG factors, for a loan to qualify as green”

For Roland Fuchs, head of European real estate finance for Allianz Real Estate, the German insurer’s property management arm, the key consideration is to ensure that lending against a specific asset does not compromise one’s own standards of governance as a lender or those of your borrower. “Both lending parties need to have a governance framework in place, including ESG factors, for a loan to qualify as green,” he explains. “It does not need to fulfil any minimum standards, but good governance is an indispensable element both parties need to comply with. Having a governance framework in place is the bare minimum we expect from a borrower.”

Most would agree lenders have a responsibility to exercise good judgement when choosing who to do business with. However, there is a debate about where the boundaries of an ESG-focused lender’s responsibility lies when it comes to structuring a loan deal.

“Having a governance framework in place is the bare minimum we expect from a borrower”

Roland Fuchs
Allianz Real Estate

Christian Janssen, head of Nuveen Real Estate’s European lending business, argues that enforcing good governance through the specifics of a loan agreement is difficult.

“A loan is not the best vehicle through which to encourage and control good governance measures,” he says. “While it might be legally and commercially permissible, it is not currently a common feature for lenders to say: ‘Dear landlord/borrower, we give you this loan, but we are imposing tight restrictions on the particular types of tenants you can have in this property, to the extent that this encompasses the activities across the whole value chain of what may be a multi-national tenant’.”

Lenders have the scope to make decisions about which borrowers they want to be associated with. But beyond that, sources agree that considering good governance is a more subtle task than setting KPIs around environmental or social targets.

Kwong: “When it comes to balancing what the environmental KPIs mean for impact versus the social and governance KPIs, it is less clear”

“When it comes to managing the financing of risk in a transaction, we have knowledge on the three parts of ESG,” says Stanley Kwong, who leads ESG origination and impact investment strategy for Aviva Investors’ real assets business. “But, when it comes to balancing what the environmental KPIs mean for impact versus the social and governance KPIs, it is less clear. That is something we need to think about.”

He adds that, when it comes to structuring an ESG loan, the governance of the borrower is an important factor, but not the most material in the context of a property transaction: “Some family offices may have poor governance with regards to the diversity of their management board teams. But is that material in the context of a building debt deal? We will continue pushing these companies to increase the diversity of their boards but, ultimately, the assets are a more material issue at this stage.”


Andrew Kirkman, CLS’s chief financial officer, speaking from the borrower side of the industry, agrees that the broad topic of good governance is a difficult one to integrate into a real estate loan deal.

“Governance for us is paramount as a listed company,” he says. “There is limited scope for us to improve on the G side, therefore.

“It is our day job, so it would not possibly make sense to get rewarded for that. I can see where sustainability fits in a loan deal. But I think that trying to get a loan across all three elements of ESG gets harder.”

Across the topic of ESG, real estate finance specialists agree there is much scope for good practice to be promoted through the medium of lending deals. Environmental targets linked to the building can be incorporated and there is scope to make societal targets related to the property a feature of loan documentation. Yet most sources agree that governance is a factor for lenders to consider holistically.

In recent years, real estate leaders have seen their industry evolve from being an asset-centric to a customer-centric business. Against that backdrop, market participants view those companies with good governance as the most likely to thrive.

Andersson: “Brunswick is focusing on having more transparent structures and more efficient reporting”

Patrik Andersson, chief executive of Swedish manager Brunswick Real Estate, says his company is focused on having more transparent structures and more efficient reporting: “It is also about how we build-in innovation and technology in our properties and internal processes. As an example, we want to get start-ups testing the products in our portfolios.”

For Andersson, governance should be thought about as how a real estate company moves towards becoming more of a services provider, where the people who live and work in its buildings take centre stage. “This is a long journey, but this is what we are working on,” he says.

Selecting sponsors with high standards of governance is the surest way for lenders to ensure that environmental and social factors pertaining to the loan collateral are not overlooked. As real estate investors aim to build the most robust portfolios, ESG is becoming a central tenet. For real estate debt providers, the same is true for their loan portfolios.


Sustainable finance is often designed to reward the borrower, but here are five incentives for lenders

Cheaper funding By issuing green bonds in capital markets to fund green loans, banks can source cheaper funding than by issuing ordinary bonds

Attract talent Younger generations in the workforce are increasingly committed to making a positive impact, and companies with clear ESG policies may appeal to them

Risk mitigation The market value of a sustainable asset is likely to be more resilient than that of other buildings, and the lower risk justifies margin discounts

Success in internal targets More sustainable loan portfolios contribute to company decarbonisation targets, thereby raising organisations’ market standing

Easier syndication As holders of debt aim to create sustainable portfolios, secondary demand for such loans is increasing

Read more:
ESG in real estate finance: How a loan can be good for the environment
ESG in real estate finance: Considering societal impact