ESG Club


estate stock and reduce energy loss, while new developments would have to consider smart solutions and energy efficient materials to ensure buildings are compli- ant with net zero goals and regulation.


Funding the transition Real estate debt investors could be crucial in helping fund the transition to net zero in real estate due to the levels of invest- ment called for, but it is essential for lend- ers to have a solid understanding of how energy is used in buildings and what measures can be taken to reduce emis- sions and energy consumption in line with science-based targets. There are challenges, particularly where there is a lack of consistent data and reporting among borrowers, as well as a disconnect between some sustainability metrics and a lack of definition regarding what net zero actually means across the industry. To play a role in the transition to net zero, lenders may want to consider improving the environmental performance of real assets over time, while also excluding investments which are considered harm- ful to the environment or society, such as assets which are involved in the extraction and storage of fossil fuels. For sustainability-conscious lenders, opportunity may be found in new green buildings with strong ESG credentials, amenities and accessibility, but there is also a significant opportunity to fund the transition by improving the environmen- tal performance of existing buildings, rather than just knocking down and developing new ESG buildings. When financing or refinancing new or existing commercial and residential buildings lenders would need to ascertain certain criteria are met. We believe EPC


PI Partnership – M&G Investments


and green building certification are the most readily available and consistent met- rics for measuring environmental perfor- mance. These can be assessed from day one and over the term of the investment to show measurable improvement while also holding borrowers accountable. Although lenders may consider excluding inefficient real estate assets as defined by the Sustainable Finance Disclosure Regu- lation – such as those with an EPC of C or below if built before 2021 – where pro- ceeds of the loan are used to improve energy efficiency and the asset is expected to meet the relevant criteria upon comple- tion of the renovations funded by the loan, then these assets will no longer be deemed inefficient. Once the relevant works are complete, they may even qualify as “green buildings” should they meet specific eligibility criteria.


When funding existing buildings that do not meet energy requirements, lenders can


hold borrowers accountable by


ensuring loan documentation includes specific clauses on energy performance obligations. This will


typically require the borrower to improve overall energy


1) IEA, “Buildings – Tracking report”, (iea.org), September 2022. 2) European Commission, “Energy performance of buildings directive”, (energy.ec.europa.eu), December 2021. 3) European Parliament, “Energy performance of buildings: climate neutrality by 2050”, (europarl.europa.eu), 9 February 2023. 4) UK Government, “Rigorous new targets for green building revolution”, (gov.uk), 19 January 2021. 5) UK Government, “Energy Performance of Buildings Certificates Statistical Release: January to March 2023 England and Wales”, (gov.uk), 27 April 2023. 6) Gerald Eve, “Energy Performance in Non-Domestic Buildings”, (geraldeve.com), July 2021.


The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.


Issue 127 | October 2023 | portfolio institutional | 37


efficiency and/or aggregate green build- ing certification as well as meet specific thresholds such as EPC B or above, LEED Gold or above or BREEAM “excel- lent or above”.


Working together


It is important for the industry to work together with key stakeholders in order to decarbonise the built environment. In our view, EPCs and green building certifi- cates are an important step to improving the transparency of ESG data being shared with the investment community. Using this data, we believe it is possible to improve the energy performance of real estate through a combination of green and sustainability-linked loans (as defined by a third party consultant), occupier and tenant exclusions and key sustainability indicators, designed to measure improve- ment in a building’s green credentials. As the case for decarbonisation in real estate grows, ESG-focused assets are becoming increasingly desirable. For lenders, this is a potential opportunity to improve environmental credentials whilst also enhancing investment performance.


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