At the close of the third quarter of 2016, the green bond market already outpaced the record-setting 2015 issuance and is projected to close the year with $70-80 billion in originations. Green property bonds have emerged as a key sector with year-to-date green property bond issuance tallying slightly above $10 billion accounting for 21% of the overall green bond market. Investor demand stems from support by various EU government pension and sovereign wealth funds, and is fed by bond issuers seeking to 1) expand and diversify their investor base, and 2) implement better risk management practices by pursuing a green bond.
Real estate issuers play a sizable role in the green bond market. With roughly 20% market share, real estate commands a significant amount of green bond issuance. Defining attributes and targeted outcomes of a green property bond require a consistent framework, that is comprised of key performance indicators sought by investors seeking both risk reduction and superior environmental outcomes.
The Green Bond Principles, developed in 2014 and administered by the International Capital Markets Association, were re-released in June 2016 with clarifications and updated market guidance along with added definitions for ‘social bonds’. The broad-based Principles provide the necessary concepts required to properly define a green bond as applied to all economic sectors. The global nature of the Green Bond Principals brings limitations when applied to industry sectors like real estate, resulting in a need for specific guidance that allows capital market participants to properly characterize real estate based performance indicators, costs and benefits, and impacts over time.
In concert with the Principles, GRESB updated the Green Bond Guidelines for the Real Estate Sector which recognize the real estate industry’s environmental and social impact, and provide specific guidance on 1) how to identify green project eligibility, 2) implement and manage investment proceeds, and 3) communicate potential and actual green bond outcomes to stakeholders. The guidelines span the full range of construction and real estate investment activities and are intended for use across multiple bond types:
- Green Use of Proceeds Bond
- Green Use of Proceeds Revenue Bond
- Green Project Bond
- Green Securitized Bond
The 2016 version of the GRESB Guidelines provides a list of aspects, certification schemes and key performance indicators (KPIs) that issuers can incorporate into their bond offering and reporting. To achieve and maintain capital market credibility, issuers should utilize environmental and/or social metrics in the project evaluation and monitoring stages. The update incorporates active feedback from the GRESB Green Bond Working Group, drawing from the expertise and recommendations of leading institutional investors, listed property companies, green bond underwriters, and institutional investors with direct experience in the development and growth of the green bond market.
An oft-heard observation of Green Bond Working Group members is how bond investors typically seek alignment between an offering’s overall sustainability goals and the underlying green bond framework used to identify eligible projects and report outcomes over time. The updated Real Estate Sector Guidelines incorporate this feedback and offer opportunities for issuers to identify track record and achievements communicated during the roadshow prior to issuance, report post-investment ESG performance, and connect outcomes to long-term sustainability goals. Transparency on track record and KPIs allows investors flexibility to provide latitude to entities lacking an ESG track record but otherwise financing credible forward-looking projects with strong sustainability objectives – second party opinions are helpful to this process.
Several green property bond investors indicated that green bond reporting should contain specific environmental impact levels, especially in cases when reduction in energy or CO2 emissions is part of the green bond offering objectives. As more institutional investors analyze the overall climate impact of their investment portfolios, bond issuers will be keen to hone in on these KPIs during bond formulation and ongoing reporting.