April 24, 2024 by Maddy McCarty

SPECIAL REPORT: Real Estate Lenders Are Missing The Chance To Make Borrowers Cut Carbon

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 and Part 1 of the series on lenders here. 

Only a third of the world’s largest real estate lenders have set decarbonization targets for their property loan books.

That is according to a new Bisnow analysis, which shows that among the 25 largest global property lenders, they hold $1T worth of real estate loans with no clear goal to reduce emissions.

Banks and other financial giants are much more likely to have set decarbonization targets for other carbon-intensive industries like oil, coal and aviation, Bisnow’s data collection revealed. Real estate is being comparatively overlooked, even though it accounts for about 40% of carbon emissions globally.

Photo: Pixabay/lalabell68

For now, lenders are far more likely to have set targets that will see them decarbonize their loan books by addressing lending to industries like oil, gas and aviation.

A report from the United Nations' Intergovernmental Panel on Climate Change last year cited real estate as a sector where urgent action is needed to avoid global temperatures rising more than the 1.5-degree target. Just half a degree above that will bring plant and animal extinctions, destructive weather events and sea levels that will destroy communities and cause mass migration. 

And while some in the debt world say it isn't lenders' job to push real estate owners to reduce carbon emissions, regulators are increasingly pushing lenders to improve reporting, and others argue they can play a vital part in an industrywide effort.

In a sector that relies so heavily on debt, they can have an outsized influence. 

“Banks are in a really powerful position,” said Emily Chadwick, the EMEA region head of ESG and risk advisory at JLL. “They have the ability to influence the decarbonization activities of the owners that they’re lending to. There is a necessity to work together.”

For now, that influence isn't being exerted. A borrower that can’t or won’t meet a lender’s climate goals can simply find a lender with laxer standards. Many financial institutions say they prefer to educate their borrowers who own high-emitting buildings instead of refusing to add them to their loan books.

Bisnow’s analysis of the largest global real estate lenders and their decarbonization strategies is part of an ongoing investigation into the world’s largest real estate players and whether they have a plan to cut their emissions. 

Following 2023, the hottest year on record, not much has changed on the real estate investor side, Bisnow found. Just over half of the 75 largest real estate owners have decarbonization targets for their real estate portfolios, but lenders lag further behind. Out of 25 lenders analyzed, only nine have decarbonization targets for their real estate loan books. You can explore which lenders have a decarbonization target and which offer green loans in Bisnow’s interactive data visualization. 

Bisnow looked at lenders’ financed emissions — those from businesses, real estate or projects to which they lend and thus help bring into existence — which is where the bulk of their carbon contributions come from.  

More than half of the lenders analyzed by Bisnow set decarbonization targets for oil, coal and aviation, while that proportion was closer to a third for real estate.

For instance, lenders like Wells Fargo and National Australia Bank confirmed they have net-zero targets for the loan book as a whole, but they don't have strategies or targets for how to reduce emissions financed by their CRE lending activities. NAB said it is working on its strategy for its CRE loan book. 

Real estate is responsible for 40% of emissions, but that overlaps with other sectors, including transportation, energy and business, said Abigail Dean, head of strategic insights for Nuveen Real Assets. Those from industries like oil and gas, aviation or motor transport are easier to get your head around because, unlike most buildings, they visibly create and burn fossil fuels.

“Lots of industries are similar. They have complex supply chains and value chains,” Dean said. “But I think that complexity means that it is very challenging for any real estate player to set a goal and be clear on. … What level of responsibility can they really take for all of that?” 

Nuveen’s parent, the Teachers Insurance and Annuity Association of America, was among the real estate investors analyzed as part of this project. 

Lenders’ structures are generally not yet incentivizing additional green implementation, said Joe Sumberg, head of real estate for climate-focused investment firm Galvanize Climate Solutions. Sumberg spent 15 years at Goldman Sachs, most recently as a managing director in the Goldman Sachs Asset Management real estate group.

“[Lenders are] just asking the question, ‘Do you have a sustainability framework? Are you tracking?’ etc.,” Sumberg said. “The question they're asking is the first step, but we need to go like 10 steps faster.”

While only a minority are addressing the issue, the part that lenders play in the fight for real estate to decarbonize is going to become more significant in the years to come, as they are pushed by the twin forces of regulation and the market. 

Photo: Courtesy of JLL

JLL's Emily Chadwick

“You need only look at the progression of regulation (California emissions rule announced last fall, SEC climate rule announced last month) to see that there’s growing interest in understanding and standardizing climate-related risk,” Stephanie Greene, managing director and sustainability solutions lead for CBRE Americas Consulting, said in a statement to Bisnow.

While those Securities and Exchange Commission rules weren't as stringent as environmental activists had hoped, they do put more onus on listed companies, which covers the vast majority of major U.S. lenders, to disclose their exposure to climate risk. 

The European Union’s Sustainable Finance Disclosure Regulation plays a similar role and covers any organization that markets financial products. 

“Lenders, as part of their financial analysis, are likely to begin accounting for climate-related risk more consistently,” Greene said. 

Coming down the tracks more quickly than regulation is realization: Lenders will likely be pushed toward favoring sustainability in the loans they make because it will be good business. That is already beginning to manifest in the industry, particularly in Europe, but increasingly in the U.S. too. 

A 2022 CBRE survey found that 84% of respondents would seek out a building with energy-reducing features and 58% would pay a premium for a building with on-site renewables. Data from MSCI and brokerages CBRE, JLL and Knight Frank found that in Europe, greener buildings command higher rents and sell for lower capitalization rates than less green peers. 

Investigating a building’s environmental performance is part of a lender’s due diligence, Dean said, as it helps them assess their risk management and likelihood of repayment. 

“I think it’s reasonable to ask a borrower questions around the energy efficiency and the carbon efficiency of the building when you’re giving a loan,” Dean said.

If a borrower isn't interested in the decarbonization of its buildings, that should be a concern for a lender, said Gregor Bamert, head of real estate debt for Aviva Investors, a lender and investor that has £47B of real estate assets.

“[If] they say, ‘No, I don’t care about that. I’m not interested in sustainability,’ I would say, ‘But why do you not want to invest in your buildings to make them better?’” Bamert said. “‘That seems an unusual strategy.’” 

Photo: Pixabay/sergeitokmakov

Regulators like the SEC are pushing banks to measure the carbon emissions they create more closely.

There is an incentive for borrowers to have decarbonization targets, too, as it can often help them secure more favorable lending terms. Green loans in real estate are gaining popularity as decarbonization becomes more prominent. Sustainable lending activity grew from $6B in January 2016 to $332B in September 2021, according to the PRI.

Despite that growth, Bisnow found that less than half of those top 25 real estate lenders have a green loan program for commercial real estate. 

“These trends are already beginning to drive demand, and, over time, likely increased value, for climate-resilient and more sustainable properties,” Greene said.  

Between increasing regulation and financial imperatives, lenders are likely to expand the measurement of the carbon emissions they finance and come up with strategies to reduce them. Indeed, Bisnow’s data shows a positive trend, with two of those lenders that don’t have a decarbonization strategy saying they will put a plan in place in the coming months.

But waiting for the future to arrive has inherent risk, Galvanize’s Sumberg said.

“They will be left behind from a profits perspective and a returns perspective. And they should be fearful of that,” he said. “The vulnerability associated with climate change is significant.” 

As sustainability metrics become more standardized and transparent, more lenders will likely set decarbonization targets for their loan books, Bamert said.

“I think there’s a huge commercial rationale for doing so,” he said.

Data is starting to show a link between net-zero carbon and building value or rental income. As a lender, a decarbonization goal can be a proxy for managing risk effectively.

That begs the question as to why lenders are overlooking real estate when they are going about cutting emissions, and why are they less likely to have a decarbonization target at all compared to investors? It’s a matter of control, experts said.

“If you’re a lender, you don’t directly control what is happening at an individual real estate level,” Bamert said. 

The capabilities of lenders and owners are fundamentally different, Dean said.

“We have a goal which covers both, but we’re very conscious of the fact that the levers that we can pull are very different as a lender than they are as an owner,” Dean said of Nuveen.

Even owners don’t have full control over their real estate, since decarbonization strategies are also dependent on occupiers, investors, the local market and other things beyond their control, Dean said. But owners are ultimately “in the driving seat” of the business decisions around decarbonization, while lenders are not, she said.

There are certain levers lenders can pull. They can apply covenants, assess the rate that will apply based on risk level and conduct due diligence to gather information about buildings’ energy efficiency and emissions status. 

“As a lender, you have that one intervention point when you decide to make the loan,” Dean said. “But after that, it’s not up to you. It’s up to the borrower to actually get on and do it.”

Lenders could refuse to lend to any high-emitting buildings. If lenders as a whole chose not to lend against less sustainable buildings, those buildings would lose value fast. 

But this school of thought isn't one real estate debt providers have embraced. That wouldn't reduce the number of less sustainable buildings in existence, and it likely wouldn’t push them to change, many in the sector said. And because sustainability goals aren't common across the industry, lenders fear that if they push too hard, they will miss out on business. 

“Someone else will still lend to them,” JLL’s Chadwick said. “So it’s kind of this Catch-22. You have to help in order to reach your emissions [goals].”