Lenders Begin to Reward ESG-Focused Projects

As recently as 2020, real estate managers stood out as the most skeptical about ESG’s impact on performance, according to a Preqin study. 

Now, though, says Aeon Investments, the lending industry is gradually shifting towards rewarding a “green premium” when financing ESG real estate projects.

Lending Industry ‘Erred’ on ESG, Aeon Said

Jumping to conclusions with little evidence to support it, the lending industry erred by taking the position that it should impose stricter borrowing terms “on those projects which clearly display few ESG benefits, rather than rewarding those that do with better lending terms,” according to Aeon Investments’ May 2022 report on ESG in real estate.

This is changing, as a “brown discount” is what many lenders are actively embedding into the Loan Market Association’s (LMA) Green and Sustainability-linked Lending Principles in their lending policies.

Specific green lending products are being offered by some that enable them to directly offer better financing options to borrowers whose assets meet ESG principles in what some call a “green premium.”

Commitment to Lowering Carbon Footprint

Jonathan Rodbell, co-founder and partner at Atlanta Property Group, tells GlobeSt.com that lenders want to collateralize assets that have the best chance of maintaining a consistent occupancy—and those focused on ESG can gain an edge.

“All things being equal, tenants are more likely to lease space in a building that has demonstrated a commitment to lowering the property’s carbon footprint,” Rodbell said. “Tenants are interested in such properties because they help meet the carbon reduction goals tenants have set for themselves, and these buildings attract and retain a young, forward-thinking workforce—many of whom have a passion for a healthier planet.”

At his company’s property, Palisades, a 640,000-square-foot office project located in Atlanta’s Central Perimeter submarket, a 1 MW solar plant is currently under construction. 

“Along with several other energy-efficient investments, this on-site renewable energy production allows Palisades to have an operational carbon footprint 40% lower than the average office building in Atlanta,” Rodbell said.

ESG Considered ‘the Right Thing to Do’

Brenna S. Walraven, RPA, CPM, BOMA Fellow, President and CEO, Corporate Sustainability Strategies, speaking during a recent Grace Hill webinar said that more investors today are asking about companies’ commitments to it.

“No longer is it something that they ask that you follow,” she said, “because a growing number are now requiring it.”

ESG practices fall squarely into “the right thing to do” category for not only a company’s moral obligations, but for their business’s bottom lines, she said.

“ESG means tracking more than environmental aspects,” Walraven said. “Governance is about how the organization mitigates risk, controls, compliance, etc. Social is about health/wellness, IAQ, and mainly about engagement with employees, investors, customers and the community, which can be measured by companies by conducting employee and resident surveys.”

A company’s ESG commitment can be measured through a GRESB survey.

GRESB stands for Global Real Estate Sustainability Benchmark, a measurement companies and their buildings can be surveyed to establish a score.

“Investors are increasingly asking and even requiring greater transparency and performance,” Walraven said. 

GRESB an Ideal CRE Benchmark

Doing so creates for companies accretive values such as increased occupancy, increased tenant/resident retention, shorter lease-up and down time, lower operating expenses, more desirable spaces (light, air), potential for rent premiums, and higher NOI, according to Walraven.

“There also are defense value contributors,” Walraven said, “which some can even deem more important, such as regulatory compliance risk; functional obsolescence risk; climate risk, such as related to flood/wind/fire/drought; insurance premium risk; carbon and resource expense risk; reputational risk; resilience risk; and recovery/business interruption losses.