Lenders: ESG applies to you, too

While real estate debt providers have made less progress than their equity counterparts to incorporate environmental, social and governance considerations into their strategies, some lenders have shown how it can be done.

Given the impact commercial buildings can have on the natural environment, as well as the health and wellbeing of the people of towns and cities, it is not surprising those developing and investing in real estate are firmly in the spotlight when it comes to sustainability.

While there is still a long way to go before the industry can be considered to have the environmental, social and governance agenda at the heart of its activities, strides have been made in recent years. Today, sustainability is a ‘must have’, rather than a ‘nice to have’, for any investment programme. GRESB – the real assets benchmark – now provides ESG-related information on more than $3.6 trillion of global assets. Real estate managers are prioritising ESG; many of their investors are insisting on it.

The debt finance part of the European property industry, however, is lagging. That does not mean real estate banking teams and alternative lending organisations are stocked full of people who do not care about sustainability. Part of the problem is that it can be difficult for lenders to get to grips with how ESG can be a genuine part of their businesses.

Direct owners of property, and the investors that back them, can make the decision to only buy buildings which perform to acceptable ESG standards, or to put money aside to improve their assets. Lending, by its nature, is one step removed and is a more reactive endeavour. Those writing loans need to know they will get their money back with interest by a given date; their primary consideration is selecting the lending opportunities which make that most likely.

However, some European lenders are demonstrating how ESG can apply to debt deals. Lloyds, ING and BerlinHyp, for instance, have this year provided loans in which the interest rate margin is directly linked to metrics which measure the sustainability of underlying assets. Borrowers that believe they can meet such standards have shown willing to take out such loans; the French REIT Gecina, for instance, has entered two such deals this year. While more work is needed across the industry to create debt-specific metrics, data such as managers’ GRESB scores are out there for lenders to measure borrowers’ ESG performance.

While there may not be as much scrutiny on lenders as there is on direct owners when it comes to sustainability, the clear direction of travel in the industry is towards higher ESG standards, and lenders need to be on-board.

Lending sustainably makes sense. As regulation and investor demand increasingly forces the owners of the built environment to make it more sustainable, the most robust lending portfolios will contain debt secured on assets that meet the necessary criteria.

Loans linked to ESG performance might be the exception to the rule, but the pioneers of sustainable real estate finance deserve recognition. While they might be one step removed from the decisions that directly impact a buildings’ sustainability, lenders have the ability – not to mention a responsibility – to ensure their business practices contribute to a positive impact.

Across a series of upcoming features, we will explore the subject of sustainability in real estate finance. Holding the purse strings for the real estate industry, at least from a debt perspective, is a powerful position; lenders keen to promote ESG should use it.

Email the author: daniel.c@peimedia.com