Photo: Bisnow/created with assistance by DALL-E

SPECIAL REPORT: In The Bare-Knuckle World Of Real Estate, Green Loans Are Losing The Fight

EDITOR’S NOTE: This is the second annual installment of an ongoing investigative series that examines one of Earth’s largest greenhouse gas emitters: the commercial real estate sector. You can read the groundbreaking initial three-part story here

Save the planet, and get cheaper debt, too. It should be the ultimate win-win. 

Green loans are a tool that could help the commercial real estate sector dramatically reduce its huge carbon output, theoretically providing a way for lenders to make money by helping borrowers decarbonize their real estate portfolios.

But commercial real estate lenders and borrowers remain hesitant to engage with green lending. Just over half of the largest lenders to the industry globally offered some form of green lending program, an ongoing Bisnow investigation into real estate’s claims around carbon reduction found.

Even as green lending to global economies has soared in the past five years, it remains infrequently used in real estate.

SPECIAL REPORT: In The Bare-Knuckle World Of Real Estate, Green Loans Are Losing The Fight
Mizuho's Tokyo headquarters. The bank has implemented a new green loan program.

Debt providers have yet to be convinced that green lending can yield the same returns as traditional lending, while borrowers are hesitant to jump through additional hoops to get financing, industry figures said.

Fears about accusations of greenwashing, coupled with pushback in some quarters against the growth of environmental, social and corporate governance factors influencing the corporate world, are also holding green lending back, others said. 

As well as the findings on green loans, Bisnow’s analysis showed only around a third of lenders had a decarbonization target that applied to their real estate loan book — meaning the majority aren't aligned with the decarbonization targets of their home countries. You can explore the findings in an interactive data visualization below.

As it stands, a moral imperative is one of the reasons lenders and borrowers are engaging with green lending. But guilt won’t lead to the market making changes by itself, said James Wong, executive chairman of Hong Kong-based Hon Kwok Land Investment Co. The financial imperatives need to be clearer, and for that to happen, the structure of green lending has to change. 

“If you want to put a number on it, guilt's worth a quarter point on interest on a loan,” he said. “That's it. That's guilt. Anything beyond that, it's got to be something that can flow down to the bottom line. Right now, that's not matching up.”

Green lending arrangements are specifically formulated as a way for financial institutions and borrowers to work together toward sustainable business goals.

There are three main types of green lending in the real estate world. There are sustainability-linked loans, which can be used for general purposes as long as they contribute to the borrower’s corporate sustainability goals. Green loans are used to fund a specific environment-focused project, like buying an old building and reducing its carbon output. Finally, green bonds, also restricted to environment-focused action, are more common for larger companies looking to apply one pot of debt to different assets or portfolios with a green focus. 

Around $564B of green bonds were issued across all sectors of the economy globally in 2023, according to data from Moody’s Investors Service and Environmental Finance Data. 

Moody’s data shows a clear geographic disparity in where green lending takes place. European institutions issued approximately $300B of green bonds, more than half of the total allocated globally for the year.

The next two biggest regions for green bonds were Asia Pacific, which issued a little over $100B in 2023, and North America, which came in at less than $100B in green bonds originated last year. 

One advocate of green lending in real estate that has just stepped into the game is Japanese bank Mizuho Financial Group, which is starting its own real estate-focused green lending program. Japan's third-largest bank plans to offer nonrecourse and sustainability-linked loans targeting the private equity sector, which typically has a shorter-term focus, as it works toward hitting its own net-zero 2050 goal.

“As a global lender, we aim to incentivize the private sector, which we feel is lagging behind in efforts, especially in the high-emission real estate market,” a spokesperson for Mizuho told Bisnow by email. 

Green lending typically tries to incentivize investors and developers to act sustainably by offering lower interest rate margins if pre-agreed environmental targets are hit. In some cases, margins rise if those targets are missed. Mizuho’s sustainable lending program for the real estate sector avoids punitive measures while incorporating rewards for borrowers, the bank told Bisnow.

Its green lending plan will include downward interest rate adjustments for borrowers working on improvements and maintaining higher standards. If a borrower hits a sustainability goal one year but misses it the following year, its interest rate won’t be adjusted. If goals are missed for a second year running, interest rates are adjusted up to their previous levels, the Mizuho spokesperson said.

But for the rest of the market, the key factor for lenders and borrowers alike right now is the perception of lost returns, experts and industry figures said.

“Banks are in the business of making money for their shareholders. They're one of the clearest, bare-knuckle capitalist organizations out there,” Wong said, adding that developers also fit the same profile. “The problem with green loans is that if [lenders] give you that quarter point, that's a quarter point they don't report on their bottom line this year. There's no real incentive for them to make that happen.”

Margins have to come down and give borrowers a significant enough discount compared to standard commercial loans if green financing is ever going to make sense when faced with the hard numbers on a bottom line, Wong said.

“You incentivize financially in systems, for developers and anyone else in the space,” Holland & Knight partner Marcy Hart said. “That's the only way to effectuate change. That's the only thing, I think, that makes people do anything.”

SPECIAL REPORT: In The Bare-Knuckle World Of Real Estate, Green Loans Are Losing The Fight
Borrowers are wary of green loans because energy generation technology like solar panels can be erratic.

One possible avenue for encouraging green lending targeted at the commercial real estate sector is insurance, said Natalie Ambrosio Preudhomme, Moody’s Analytics associate director for commercial real estate. Climate adaptation and resilience is hugely important to insurers, who may be more enthusiastic about underwriting policies prioritizing climate-focused projects.

“We're really seeing that affecting transactions in the CRE space because it's challenging for borrowers to get the coverage that lenders typically require,” she said. “This is catalyzing a more detailed conversation between borrowers and lenders and insurers.”

Regulation is also a key element that could encourage green lending activity, experts said. That is starting to ramp up in the U.S. right now: The tax incentives provided in the Inflation Reduction Act of 2022 are expected to encourage green lending, although the legislation is so new that it’s unclear how it will play out.

“If you do have the funds coming in from the IRA in terms of the various tax credits and deductions — which are not insignificant; they can certainly help make the project kind of pencil out — I think it's still very early days in terms of figuring out whether a borrower can take advantage of better pricing if they're going to be green,” CRE Finance Council Head of Regulatory Affairs and Sustainability Sairah Burki said. 

“But I think there's a lot of opportunity out there for the lending sector, and I think people are starting to figure it out slowly.”

A tax break wouldn’t necessarily move the needle in China, Wong said, but it could pan out in Hong Kong, where the currency is pegged to the U.S. dollar and where financial systems contain similarities to those in North America and Europe.

“Things like carbon credits, that might be one of those things that helps close the gap, because carbon credits are a tax. And if you create a tax, then savings might be able to offset the tax,” Wong said. “I see that as a possible gap-closer.”

Between the different types of green loans — all of which have nuanced definitions — there is a need to standardize language to create consistent, industrywide terminology, Preudhomme said. 

Bisnow’s examination of lenders’ green loan initiatives found that lender standards and definitions varied dramatically. Some followed guidelines laid out by regional trade associations, like the frameworks from the Europe, Middle East and Africa and Asia Pacific iterations of the Loan Market Association and the U.S. equivalent, the Loan Syndications and Trading Association. But others used different standards, ranging from those provided by Fannie Mae and Freddie Mac in the U.S. to their own internal frameworks based on external guidelines.

And the murkiness that comes with a lack of widely agreed-upon lexicon may also be holding lenders back from implementing programs, according to CREFC’s Burki. 

“I think a lot of organizations are probably shying away from more of the formal labels, calling something a green program or a green lending instrument,” she said.

SPECIAL REPORT: In The Bare-Knuckle World Of Real Estate, Green Loans Are Losing The Fight
Global heating is increasing the frequency of incidents like forest fires, scientists have found.

Fanfare is often lacking in announcements about lenders’ green lending initiatives for a specific reason, she added.

“It speaks to a broader issue: There's obviously concern around greenwashing, and that’s growing,” Burki said.

Perceived greenwashing has become a focus for the Securities and Exchange Commission and European regulators as they try to ensure that companies aren’t claiming credit for environmentally friendly actions that don’t actually address climate concerns, Burki said.

In the U.S., the SEC has a task force with a mission to crack down on greenwashing. Its actions have included charging Goldman Sachs with failing to follow ESG policies and procedures involving an account strategy and two mutual funds. The investment bank agreed to pay a $4M fine.

The European Union adopted a law in January outlawing misleading environmental claims and requiring sustainability labels to be backed by approved certification schemes. 

Another barrier, particularly in the U.S., is the political opposition to climate-related measures.

Some 25 U.S. states have proposed or passed legislation restricting whether ESG measurements can legally be considered as factors in investment decisions, according to a tracker from law firms Ropes & Gray and Morgan Lewis. Florida’s law bans financial institutions from issuing ESG bonds, using public funds or cash flow from public funds to pay for third-party ESG bonds, or entering into a contract with ratings agencies whose ESG scoring system would impact an issuer.

Similar factors, like anti-ESG rhetoric on Capitol Hill, may be slowing progress toward fleshing out green lending programs, Burki said.

“With a lot of this political rhetoric on the one hand and a lot of the regulatory pushback on the other, there might be just some hesitancy in having some more of these formal programs,” Burki said.

But reputational concerns are far from the only hurdles for the industry. The complications borrowers face when applying, being approved for and later meeting loan conditions are a serious challenge for a lot of would-be borrowers. 

SPECIAL REPORT: In The Bare-Knuckle World Of Real Estate, Green Loans Are Losing The Fight
Worries about being accused of greenwashing have held lenders back from offering green loans.

Decarbonization is a complicated process, but green lending needs to be made simpler if it is going to take off in real estate.

Wong, whose Hon Kwok Land Investment Co. just got building permits for a fully solar-powered building in Hong Kong that will emit tens of thousands fewer tons of carbon dioxide than a building using traditional power sources, said he thought about using a green loan to fund those plans. In the end, it was the paperwork that made the company decide against it.

“I would have to essentially appoint a person to just fill out forms during building before the loan is issued, and then for the three years of the loan just to do the reporting,” he said.

Additionally, he said, green loan terms are often shorter than standard commercial loans, and penalties are usually far greater than any return that borrowers can get from using a green loan. The margin reduction is typically between a quarter and 35% of a percentage point, while a penalty for not fulfilling a reporting requirement is sometimes as high as a full percentage point, he said.

“Those targets are not completely within my control,” Wong said. “For solar panels, I have extremely cloudy days, so I don't generate as much power as whatever the forecast is, and there's no built-in flexibility whatsoever for this kind of thing.”

Holland & Knight’s Hart said borrowers are often intimidated by the requirements.

“Considering all the hoops you have to jump through to make or to qualify for a green loan, the financial terms aren't really that beneficial,” she said. “What is beneficial is long-term use of the building because of the utility savings and the ESG, the sustainability of it all, and your employees want it, and your resale value of the buildings.”

By signing on to green financing options, borrowers extend the life span of their properties or portfolios and avoid ending up with stranded assets, CREFC’s Burki said. But the long-term benefits haven’t resulted in an immediate increase in value for properties that are pursuing sustainability, she said.

“When we kicked off the sustainability initiative, we'd be speaking to a lot of our members — the bankers, investors, issuers — trying to determine if there is sort of this ‘greenium.’ If a borrower, for example, has fulfilled specific criteria, is there a pricing advantage potentially they could receive on a loan they're taking out?” she said. “What we've seen — I don't know if it's changed recently — but what we see, at least in the U.S., it's negligible.”