Investors to scrutinise green property bonds

As property developers and bond issuers respond to the need for more green buildings along with the regulatory pressure supporting these construction alternatives, investors must look closely at how sustainable these instruments are.

According to BNY Mellon IM, with so many attributes and features of a building, being able to distinguish it as genuinely green can lead to potential ‘greenwashing’ or exaggerated claims on the environmental friendliness of underlying property-based assets.

“Some green buildings and issuance tied to them can hold the potential for greenwashing due to confusion over the multiple green building certification schemes and the level of certification that green bonds are targeting,” said senior BNY Mellon IM credit analyst Karsten Hartmann.

Given that common classification schemes used to categorise green building standards in Europe include the global BREEAM standard, the US LEED designation and the EPC standard, questions can be asked about how green each certification level is reached and the appropriateness for green bond issuance.

This is the case with a variety of companies involved in different building types. “These are important aspects for investors to consider,” added Hartmann.

Taking care with green credentials

According to research, buildings now account for about 38% of annual global greenhouse gas emissions globally.

To tackle this in Europe, for example, the EU is targeting a reduction in 60% of the building sector’s emissions, to meet the overall EU objective of a 55% reduction in emissions by 2030.

In line with this, an increasing number of green bonds are targeting green buildings via use of proceeds structures and bonds aimed at supporting or funding green building development. The Climate Bond Initiative suggests these are expected to account for about 40% of the green bonds market over the long term.

Yet despite the appeal of green bonds to fund or invest in greener developments, BNY Mellon IM believes the sector needs to pay attention to how it defines green buildings.

“Investors do need to be able to compare each green bond standard and understand the positive environmental impact being delivered by each green bond certification level,” explained Annabel Jennings, an ESG analyst at the firm.

“Questions around why issuers have selected green bond certification, what their rationale is for selecting specific certification and rating levels, what percentage of any given company portfolio has green building certification and what their net zero targets are and how the issuer plans to manage and mitigate ESG risks associated with buildings, are just some of the tests investors can use to weigh the robustness of the bonds they seek to invest in,” she added.

Looking ahead, if an issuance can pass the test, green buildings could play a critical role in reducing building sector emissions – as well as in responsible investment more broadly.