Incorporating environmental, social and governance measures into property loans should remain an important focus for the real estate finance industry as it deals with the challenges posed by covid-19, CBRE Global Investors’ head of ESG has told Real Estate Capital.
The firm recently arranged a €45 million ESG-linked loan, plus a €15 million accordion facility, for its European Industrial Fund, in which the loan margin is affected positively or negatively depending on the vehicle’s performance against key sustainability indicators.
“High ESG performance can be seen as a form of risk management,” said Aleksandra Njagulj, global head of ESG at CBREGI. “It follows that ESG should retain or even gain in importance in times of crisis.
“We have seen evidence of this in recently released data where ESG equity traded funds see a steady increase practically unaffected by the [covid-19] crisis. Even more importantly, high ESG performance directly tackles climate-change-related risks.”
With many European countries in lockdown to combat the coronavirus, Njagulj conceded that certifying the assets within the timeline agreed in the loan terms will become more of a challenge. Long-distance photo evidence gathering is replacing routine physical visits to sites, for example.
“We need to be very active towards the end of the year and complete the audits quickly in order to get the evidence we need,” said Njagulj. “Of course, the fact that it’s sitework is proving to be a challenge, but we should still be able to hit our ESG targets.”
The loan’s ESG targets relate to onsite renewable energy technology, energy-efficient lighting, operational green building certification and energy efficiency ratings. The key performance indicators are linked to GRESB, the Amsterdam-based ESG benchmark for private real estate.
Njagulj added that attention to ESG and organisations’ ambitions in terms of their ESG performance have “skyrocketed”. She added: “It is true for lenders, as well as our investor clients and our tenants.”
According to Tom Berens, director, treasury and debt financing for the EMEA region at CBREGI, sustainability was, until a couple of years ago, a “tick the box” exercise with limited emphasis placed upon it. Now, he said, it is one of the first subjects that banks raise.
“Green, sustainable buildings are more risk-averse and are preferred by both tenants and investors,” said Berens. “Providing sustainable loans and working with borrowers with green agendas is now part of several banks’ strategies. So, a loan like this is mutually beneficial to us and a bank like ABN AMRO.”
Berens added that all the banks CBREGI spoke to about the European Industrial Fund’s new finance facility were “very positive” about the request for a specific green loan. However, he said that despite indicating willingness, not all the banks in the running had a clear ESG-linked structure or proposal in mind. “The lending landscape could still improve when it comes to providing green loans and making sure sustainability-linked structures work for borrowers as well as lenders,” he said.
“For us, it is simply good business to have a strong ESG strategy,” said Njagulj. “Generally, we integrate ESG in the full cycle of each fund and asset as a default for all our clients. There is growing evidence of a positive correlation between the funds and assets that perform well in ESG and in their financial performance.”
Speaking about overall borrowing conditions in light of the covid-19 crisis, Berens said he notices an immediate impact on pricing: “From talking to lenders, we know that their liquidity costs are volatile at the moment. Hopefully after we are beyond the peak of the crisis, liquidity costs will normalise and the impact on margins will be limited.”
In the sustainable financing space, CBREGI is already working on its next ESG-linked loan – another logistics financing.