Green Bonds – Market Transformational or the Emperor's New Clothes?


The rise of green bonds has been exponential over recent years rising from $1.2 bn in 2011 to an expected $70 bn in 2015. So, does this new form of debt finance represent a real opportunity for transforming the sustainability of the real estate sector, or is it simply a case of the emperor’s new clothes?

Last month, Justine Leigh-Bell from the Climate Bonds Initiative made a fascinating presentation to the BBP Market Transformation Working Group and we were joined by Christophe Garot from Unibaill Rodamco one of the first real estate sector issuers of a green bond.

There are a number of facets of green bonds that make them of particular interest from a sustainability perspective:

  • Unlike many other real estate sustainability initiatives, they focus on the performance of assets (as opposed to a corporate entity or fund) – so they present a real opportunity to understand how assets perform and compel the issuer to set ambitious targets for improvement.
  • The rules governing the ‘use of proceeds’ mean that the investment gained through the issuance of bonds must be used on that particular asset to improve its performance so there is a direct relationship between the investment and the assets’ performance.
  • The lifetime of the bond can enable the issuer to take a longer-term approach to investment in assets.

But what about from an investment perspective? The ‘cost’ of a green bond does not differ from a conventional bond, so to all intense purposes it is a straight choice between conventional and ‘green’. And, one of the main advantages of a green bond to issuers is that it allows them to diversify their investment base – this was certainly the case for Unibaill as Christophe explained: ‘Our CFO was delighted that we had brought a new profile of investors to the company’.

So it sounds as if the stars are aligned … well maybe. I am an eternal optimist, but if we didn’t have some challenges along the way it wouldn’t be any fun!

How do we know that the green bond is green? One of the key issues is transparency and credibility – what does ‘green’ mean and how is it measured and monitored over the lifetime of the bond? The Green Bond Principles developed by the International Capital Markets Association set out the processes that should be adopted when issuing a green bond and these have recently been complemented by the ‘Green Bond Guidelines for the Real Estate Sector’ issued by GRESB.

The Climate Bonds Initiative (CBI) has published its own Low Carbon Buildings Standard. This standard sets criteria for three different investment pools (residential, commercial and upgrade projects) and provides specific criteria that the assets must meet in order to be certified.  One interesting requirement of the CBI Low Carbon Buildings Standard is that there must be long-term targets that match the lifetime of the Bond, these should go beyond a ‘Business As Usual’ scenario and, importantly, are most concerned with ‘performance in use’ as opposed to ‘designed performance’. This could enable investments to be made that exceed the usual investment criteria for payback periods and prevent what Justine calls ‘lock-in’ – short term strategies that enable incremental improvements in performance, but prevent longer-term deep cuts in emissions to be made.

So certification would enable us to ‘trust’ investments in green bonds, but whilst the number of green bonds being issued is increasing, the number certified is very small  - the CBI standards only cover 15% of the market, so there are an awful lot of ‘uncertified’ bonds out there in the market. This leaves this form of investment open to criticism and, some might argue, exploitation – a definite opportunity to exploit new investment markets in the name of sustainability. The growth of green bonds standards and certification bodies will hopefully help to address this. And, there is a cost to certification, but at only one tenth of a base point, some might argue the benefits outweigh the costs.

One of the biggest challenges is the lack of data. In the US and Australia (which according to Justine is one of the regions on the verge of a green bonds revolution) they can measure performance by using data gathered for the purposes of gaining Energy Star and NABERS accreditations. But what about here in the UK – there is no measure or benchmark of performance in use … or is there? The REEB (Real Estate Environmental Benchmark) initiative run by the BBP is one of the largest and most credible sets of performance in use data with a dataset of over 1,000 assets and historical performance data based on whole buildings. Perhaps this could be a solution to the lack of data and benchmarks to certify the performance of individual buildings in the UK?

One of the final and, slightly more controversial challenges is ‘do investors really care?’ Having made the initial investment in a green bond, how many investors track the bonds’ performance against its ‘green’ credentials?  The ability of an investor (particularly in the debt market) to engage in any great detail is limited – not only in terms of the time they can afford to interrogate the sustainability performance of the assets, but also in terms of their sustainability knowledge. However, sometimes transparency and reporting can initiate unexpected rewards - Christophe from Unibaill indicated that following the issuance of their green bond and reports on the bonds’ performance a number of investors asked to visit the assets, keen to see evidence of initiatives that were being undertaken to improve performance.

So … what does the future hold for green bonds? The growth of the market is evident, but greater credibility is required for green bonds to avoid them falling into the ‘greenwash’ bucket. This can only be achieved through increased certification and better data provision. And, as always, the investor holds the ace – if they take an interest in the performance of their green bonds, this will drive the market to be more transparent and accountable and challenge the owners to continually improve the performance of the asset beyond ‘business as usual’.

If we can crack all of these challenges, green bonds could be one of a growing number of tools in our armoury, offering the potential to leverage investment to improve the long-term performance of individual assets. And, as you may know, at the BBP we love practical tools that aid market transformation…