Bond investors eye green buildings

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With buildings accounting for over 35% of greenhouse gases globally[1], green construction alternatives are attracting the attention of both developers and bond issuers. Yet are these investments always as sustainable as they seem? Here, Insight Investment ESG analyst Annabel Jennings and senior credit analyst Karsten Hartmann explore the world of green property bond investment.

With buildings accounting for over 35% of greenhouse gases globally , green construction alternatives are attracting the attention of both developers and bond issuers. Yet are these investments always as sustainable as they seem? Here, Insight Investment ESG analyst Annabel Jennings and senior credit analyst Karsten Hartmann explore the world of green property bond investment.
 
While the fight against climate change often focuses on Co2 emissions from burning fossil fuels such as coal and oil, other sources of greenhouse gas emissions can also make a damaging impact on the environment.
 
Perhaps surprisingly, buildings now account for about 38% of annual global greenhouse gas emissions globally[2]. 27% of emissions come from the operations of buildings including 17.5% of global emissions coming from the energy use in buildings[3].
 
The remaining 11% comes from the embodied carbon, the GHG emissions associated with building materials and construction[4]. While progress is being made in the energy efficiency of buildings, direct building CO2 emissions need to halve by 2030 for the globe to remain on track for a net zero world. Tackling the embodied carbon from construction materials has seen less focus.
 
Beyond climate change, building construction also interacts with the environment through its use of natural resources such as water. The day-to-day operation of buildings can also generate its own environmental pollution.
 
Growing awareness of the climate impacts of construction has seen the rise of so-called green buildings, whose planning, design, construction and operation feature strong social and environmental credentials.
 
A number of features distinguish a building as being green, including:
  • Efficient use of resources including water, materials and energy use
  • Renewable energy use
  • Reduced pollution and waste including the re-use and recycling of materials
  • Improved indoor environmental quality
  • Ethical and sustainable supply chain
  • Low impact – in terms of the lifecycle of a building and the impact these buildings have on the environment
  • Strong labour management including health and safety practices

Regulatory pressure supporting the development of green buildings is also coming from various global policymakers. In Europe, the European Union (EU) is targeting a reduction in 60% of the building sectors emission in order to meet the overall EU objective of a 55% reduction in emissions by 2030[5].

Making the grade
Common classification schemes used to categorise green building standards in Europe include the global BREEAM standard, the US LEED designation and the EPC standard. From an investment standpoint, an increasing number of green bonds are targeting green buildings via so-called use of proceeds structures and bonds aimed at supporting or funding green building development are expected to account for about 40% of the green bonds market[6] over the long term, according to the international climate action group the Climate Bond Initiative.
 
Yet while green bonds funding or invested in green building development may seem an attractive option for those seeking to invest responsibly, the sector is not without its potential pitfalls.
 
According to Insight Investment senior credit analyst Karsten Hartmann, the sheer number of building attributes and features distinguishing a building as being green can open the door for potential ‘greenwashing’ or exaggerated claims on the environmental friendliness of underlying property-based assets.
 
Some green buildings and issuance tied to them can hold the potential for greenwashing due to confusion over the multiple green building certification schemes and the level of certification that green bonds are targeting,” he explains.
 
There can be questions over how green each certification level is reached and the appropriateness for green bond issuance, particularly with a variety of companies involved in different building types and these are important aspects for investors to consider.”
 
While Insight ESG analyst Annabel Jennings believes the sector does hold growing potential, she says investors should take a thorough view of the green credentials of target investments they aim to gain exposure to.
 
While green buildings are becoming a major part of the green bond market any type of building, such as a residential office or property can be considered green if they meet certain, fairly wide criteria. Ultimately, investors do need to be able to compare each green bond standard and understand the positive environmental impact being delivered by each green bond certification level,” she  says.
 
Questions around why issuers have selected green bond certification, what their rationale is for selecting specific certification and rating levels, what percentage of any given company portfolio has green building certification and what their net zero targets are and how the issuer plans to manage and mitigate ESG risks associated with buildings, are just some of the tests investors can use to weigh the robustness of the bonds they seek to invest in.”
Towards 2030
With the European Commission estimating that reaching 2030 climate targets will require additional annual investments of €360bn on average[7], there is scope for many types of green investment – including green property bonds.
 
Against this backdrop, and despite some concerns over greenwashing, Jennings believes green buildings could play a critical role in reducing building sector emissions. And with an increasing number of green bonds targeting green property bond investment, these structures look set to play an increasingly prominent role in responsible investment.

[1] World Green Building Council. New report: the building and construction sector can reach net zero carbon emissions by 2050. 23 September 2019.
[2] Ibid
[3] Our world in data. Sector by sector: where do global greenhouse gas emissions come from? 18 September 2020.
[4]  Architecture 2030. Why the built environment? 2021
[5] European Environment Agency. Greenhouse gas emissions from energy use in buildings in Europe. 26 October 2021.
[6] Climate Bonds Initiative website as at May 2022.
[7] Bruegel. How much investment do we need to reach net zero? 25 August 2021.

1042542 Exp: 06 January 2023

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