Banks play a key role as providers of finance in the real estate sector, itself a large contributor to global emissions. Our latest paper sets out this potential and outlines engagement asks to support investors in their conversations with lenders.
Banks have a uniquely important role to play in decarbonisation across multiple sectors. As primary providers of finance, they can materially impact how fast the global economy decarbonises. Investors committed to net zero are keenly aware of this potential.
The real estate sector is responsible for roughly 42% of global emissions, and with rising regulatory obligations and investor demand for sustainable assets, the sector must balance decarbonisation goals with the ever-growing need for new homes and buildings.
With substantial exposure to the real estate sector, banks face two imperatives in this context:
This means setting out a decarbonisation strategy to manage climate-related risks while capitalising on the economic opportunities presented by the sector’s growth and its decarbonisation.
Our latest guidance highlights the positive role that banks can play in decarbonising the real estate sector, structured under five key asks for investors to consider in their engagements.
Challenges to progress
It’s important to recognise the challenges that banks and their clients face in this process. Those seeking finance for real estate decarbonisation can encounter barriers due to the high upfront cost for green technologies, regulatory hurdles to financing processes, and a lack of reliable data.
Physical climate risks, such as increasingly frequent disasters like flooding and wildfires, pose a significant threat to real estate assets, potentially leading to higher insurance costs and reduced property values which can in turn affect loan repayments.
Failure to act can lead to greater risks. Banks must adequately assess and address climate risks facing the sector to support the transition, reduce dependency on carbon-intensive materials and mitigate the risk of stranded assets. Systemic risks can further arise from volatility in energy prices and energy security concerns.
A regulatory environment that facilitates and safeguards financial flows towards the sector’s transition is therefore essential. New regulations frequently catalyse significant market growth, and banks have an important role to play in encouraging supportive polices, fostering collaboration with the broader ecosystem, and promoting consistent government strategies to help overcome challenges and manage risks.
Addressing embodied carbon
Around 64% of real estate emissions can be attributed to building operations, with the rest coming from the embodied carbon in building materials and the construction processes. On this basis, there a clear business case for banks’ decarbonisation strategies to focus on financing upgrades of existing, high-emitting properties as well as the new construction of new, energy-efficient buildings.
Failure to do so could lead to an increase in stranded assets. Carbon-intensive buildings overlooked for retrofits may become too costly to maintain and consequently lose value. This can slow real-world decarbonisation if the number of energy-inefficient buildings increases.
A better understanding of asset-level emissions profiles can help banks to identify potential stranded assets and strategic actions to mitigate this risk. Promoting the use of low-carbon building practices to reduce these embodied emissions can also address a sizeable portion of the sector’s carbon footprint.
Opportunities in the transition
Decarbonising real estate assets globally will require roughly USD 10 trillion in investment by 2030, according to HSBC. This funding gap represents a clear opportunity for lenders, who directly finance improvements in energy efficiency and the transition to a low-carbon economy.
Decarbonisation measures that can drastically reduce emissions already exist and can scale if supported by an enabling regulatory environment. Alongside the better management of transition and physical risks, these solutions can reduce operational costs and help to protect the long-term value of assets.
The Bank of England highlighted that more energy-efficient assets reduce the likelihood of loan defaults. Banks can work with their real estate clients to find these opportunities across the lending lifecycle and encourage low-carbon choices. This could be through providing finance, such as “green” loans and preferential interest rates for climate-related retrofits, or offering advice on regulations, government schemes and the costs and benefits of property renovation.
Banks can also help to support a just transition by improving the ease of access for homeowners looking to finance and undertake retrofitting, a topic frequently considered by policymakers.
Evolving policies will be key to help finance scale to meet this challenge, and our paper sets out the important role that banks can play in engaging the broader ecosystem. This includes regulators, policymakers, industry, the wider supply chain and clients. Disclosing the challenges they face in these engagements would be of further benefit to investors.
Investors are ready
Investors are key actors in this decarbonisation effort, engaging with banks’ transition plans in line with their individual strategies, commitments and mandates. They can use their influence to encourage banks to ensure that their real estate lending practices contribute to the low-carbon transition while protecting the long-term value of assets.
Our report can support investors in these engagements. Its key asks aim to help facilitate productive conversations with banks on their efforts to help decarbonise the real estate sector, including suggested questions to help guide informative discussions.
If you’d like to take part in our working groups and help shape the outputs of our resources, why not get in touch today to learn more about becoming a part of IIGCC?