Two years ago, I left my finance policy director role at the British Property Federation to take the helm at the Commercial Real Estate Finance Council (CREFC) Europe, the trade association for commercial real estate (CRE) lenders and debt investors. At the time, I was struck by how different the equity and debt sides of the CRE industry were. Everyone was investing in the same asset class, albeit in different parts of the capital, so with different risk and return expectations – yet the culture and policy concerns of market participants barely overlapped.
Sustainability was one of the points of divergence: entirely mainstream at the BPF, but barely on the map for lenders, who were as likely as not to interpret the term as a reference to financial sustainability. Looking back two years on, it’s striking to see how attitudes on the debt side of the industry have changed.
In his recent blogpost on this site, David Short outlined the work of the Better Buildings Partnership on sustainability from the lender perspective over the last couple of years, which culminated (until the next culmination!) in a useful BBP briefing and a joint BBP, CREFC Europe and GRESB seminar. I’ve been delighted to be part of these efforts, and heartened by the strong and diverse turnout at the seminar. I had occasionally tested the water for a sustainability-focused event since joining CREFC Europe, but this was the first time we felt confident that we had critical mass.
Without a doubt, regulation has been key to focusing minds: the UK’s minimum energy efficiency standards (MEES) can directly affect the value of a lender’s security. For lenders who generally have no control over how buildings are used, this provides a powerful reason for focused energy efficiency-related due diligence, as well as for better ongoing communication with borrowers about how sustainability risks are managed and mitigated.
Perhaps more surprising has been the way investor pressure has begun to encourage debt fund managers to upgrade the attention they give to sustainability matters. Sustainability is inevitably of more remote and indirect relevance to a lender than to an owner, but the pressure to demonstrate their own sustainability credentials to investors is encouraging debt fund managers to think about how they can be a positive influence.
For commercial banks like RBS, there are other potential advantages, like using the expertise and data gained from diverse, large-scale CRE lending to educate and support their less sophisticated borrowers in tackling sustainability issues. Others, including BNP Paribas, are exploring the opportunities for developing a market in asset-backed green bonds/loans.
It’s still early days, but in the last couple of years the CRE debt industry has moved from mostly blank looks to a lively interest and growing expertise in sustainability, both in terms of better risk management and for new opportunities. The extent and quality of sustainability regulation will undoubtedly be an important factor in what happens next, within the UK (how MEES regulation evolves and the credibility of energy performance certificates (EPCs)) and internationally. Policymakers and industry are all on a sustainability learning curve and need to keep talking; but crucially, lenders are now also part of the conversation.