How Aviva’s £1bn ‘climate transition’ lending programme will work

The UK insurer has pledged to originate £1bn in sustainable real estate debt by 2025 under its new sustainability framework.

Aviva Investors, the UK insurance company lender, announced on 8 December its commitment to originate £1 billion (€1.1 billion) in sustainable property debt over the next four years. The company said this will be supported by the launch of a proprietary framework for ‘climate transition’ loans for commercial real estate.

Through the framework and loans programme, the company is aiming to create long-term sustainability-linked incentives for borrowers, to ensure measurable environmental and energy efficiency improvements to the buildings it lends against. Borrowers can benefit from a reduction in the cost of debt, awarded when predetermined sustainability improvements have been made.

The loans will be third-party accredited by the environmental, social and governance rating and research agency Vigeo Eiris to ensure they comply with the Green Loan Principles published by the UK’s Loan Market Association in 2018 and updated earlier this year.

Bamert: “We are embedding measurable ESG commitments into the loans”

Gregor Bamert, head of real estate debt at Aviva Investors, spoke to Real Estate Capital about how the lending programme and broader framework will work.

What do you mean by ‘climate transition’ real estate debt?

These are loans designed to improve the environmental performance of individual property assets. We are embedding measurable ESG commitments into the loans, setting out specific requirements for real estate borrowers to adhere to with the aim, for instance, to reduce carbon emissions from existing buildings.

How will the provision of these loans work in practice?

We want to focus on existing buildings. When we talk to a borrower about providing a loan against a specific building, we would agree specific measurable and meaningful key performance indicators for that building which need to be achieved over time. If those improvements are achieved, we will be able to reduce the margin on the loan, therefore creating an economic incentive.

While both the exact KPIs and economic incentives will vary from one asset to another, these could include reducing carbon use or ensuring all assets are environmentally certified by long-established sustainability standard BREEAM.

The primary focus of the initiative is to tackle climate change, so buildings’ targets will focus on the E aspect of ESG but will also address some aspects from the social part, the S of ESG.

How do you plan to monitor the fulfilment of those KPIs?

Apart from Aviva Investors’ internal capabilities to ensure any set targets are being met, we have partnered with Vigeo Eiris, which has provided us a second-party opinion on the framework and will do the same with the loans.

Borrowers’ progress in hitting the targets will be assessed annually throughout the life of each facility. If they comprehensively fail to meet the KPIs they agreed to when borrowing any debt, there could be covenant breaches or cash traps, not just potential margin increases.

We want to align the commercial aspect of loans to ambitious green targets but also to their cost. If borrowers agree on KPIs that involve a high capital expenditure, we should clearly give them a meaningful incentive.

Is the pandemic resulting in a greater emphasis on sustainability in real estate finance?

Yes, it is a natural consequence. The pandemic has clearly posed challenges of all sorts for borrowers and lenders, forcing them to think deeper on the long-term viability of any asset. Sustainability is embedded in these long-term thoughts.