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Responsible development finance

July 14, 2021

How responsible development finance can help tackle climate change - Paul Butler, Chief Financial Officer, Kingsbridge Estates

Green is in the mainstream. Looking after the world around us as custodians for future generations is no longer dismissed as the obsession of a minority – it’s a responsibility we all must step up to.

Increasingly in the world of property development this responsibility extends not just to the buildings and spaces we create, but also to the way we finance them. Investing in buildings in a way that encourages sustainability is becoming ever higher on the list of priorities through a combination of increased awareness of environmental issues, the demands of occupiers, and regulation.

Of course, awareness and concern about our impact on the natural world are not new, but recent events have focused minds to a greater extent. The pandemic lockdown led all of us to appreciate our local surroundings more, while campaigners including Greta Thunberg have put climate change front and centre in the public consciousness among people of all ages. Later this year, the UN COP26 international climate change conference in Glasgow will reinforce that these priorities are close to home.

As an investor and developer with a long-term view, at Kingsbridge Estates we are keenly aware of the impact our work can have on the communities we work in, and our responsibility to build a sustainable future for generations to come.

Alongside that, green investment simply makes good business sense – more sustainable buildings attract occupier’s conscious of their own Environment, Social and Governance (ESG) agendas and there is evidence that more sustainable buildings can attract higher rents.

Banks and lenders are a key driving force behind the property market and will play an increasingly important role in keeping ESG high on the agenda of property developers and owners.

Banks, such as Lloyds, are increasingly offering “green financing” for real estate projects – offering discounts if businesses agree to bring measurable, verifiable eco-friendly initiatives into their schemes.

This isn’t just altruism – it is in anticipation of tougher regulations around the letting of non-domestic properties with the aim of reducing carbon emissions. Under the current Minimum Energy Efficiency Standard (MEES), set in 2015, it is unlawful for landlords to rent out any property with an Energy Performance Certificate (EPC) of below E, subject to certain exemptions.

The Government has announced its intention that by 2030, that standard will be tightened and set at an EPC of B – making it illegal to rent out any property rated C or below. This has been described as a potential time-bomb for commercial property owners – while only 10% of existing properties would fail to reach an E rating, currently, 85% of building stock is under the standard for a B certificate.

It may be that the task at hand is so huge and the impact on the economy would be so disastrous that the timescales will slip, or the legislation may be watered down to make a C rating the target. However it works out, there is a clear agenda here and investors and developers need to make sure they are acting upon it.

Soon, there won’t be discounts to encourage greener development – it will become a given that lenders, in order to protect their investments, will insist on ESG commitments as standard. We would expect to see this happen within the next one or two refinancing cycles for most properties.

Owners of existing properties have work to do. They will need to assess properties to see what can be done to bring them up to B standard. In some cases, this may simply involve tweaks such as replacing old and inefficient lighting with LEDs. However, in other situations, more drastic measures may be required, for example the installation of insulation in the walls or roof or replacing heating or air conditioning systems.

For new developments it’s vitally important to build to the highest possible energy saving standards. For example our newest commercial schemes – Concorde Park in Segensworth and Spring Park in Havant – were designed to exceed the requirement, with Concorde Park  meeting BREEAM ‘Very Good‘ standard and achieving an EPC A rating and Spring Park designed to achieve the same high ratings when completed.

ESG is important to every stakeholder, including occupiers, but it is banks that are going to be a powerful driver of change. At the moment, their requirements tend to focus on EPC ratings, but we are likely to see a clearer definition of what “green lending” means as time goes on because currently, there is no hard and fast standard.

Many of the green real estate loans written to date have been put together in line with the International Capital Market Association (ICMA) Green Bond Principles and the Loan Market Association (LMA) Sustainability Linked Loan Principles and Green Loan Principles. These are voluntary industry guidelines and stop short of providing definitive checklists for borrowers and lenders.

CREFC Europe, the body representing commercial real estate lenders in Europe, recently convened a working group on green lending that is likely to produce new measurable ways to evaluate environmental measures – perhaps by encouraging retrofitting of existing buildings and setting targets for reducing environmental risks over time.

In addition, the EU’s sustainable finance taxonomy, which has been published in draft form and is to be adopted in the UK despite Brexit, is expected to impose tougher rules on what lenders can label as ‘green’ and ensure greater consistency.

For our part, Kingsbridge Estates has a clear strategy for long term, sustainable and responsible growth and we choose to deal with funders and partners who share our commitment to ESG. We firmly believe that ethical and green finance has the potential to help the industry play its part in tackling climate change and improving the environment regionally, nationally and internationally.

The more we do our own bit as individuals and companies and pull together as a whole, the closer we will get building a better future.

Read more about our commitment to ESG here.