There is huge appetite among investors for green bonds - securitised debt issued to raise capital for projectd that benefit the environment.
As an illustration our €500m five-year green bond issuance was over six times oversubscribed.
So far this year $325bn has been issued in green bonds. This compares with $274bn in the whole of 2019.
Those who meet the required green bond criteria enjoy what has been called a sustainability ‘greenium’ – the difference in the cost of debt compared to a non-green bond. For Tritax EuroBox (EBOX) the move into the bond market – and the green bond market in particular – has meant significant savings.
The overall coupon on this bond was just 0.95%–a record low for a debut BBB-rated real estate issuer. Our previous average cost of debt was 2.3%. The proceeds raised will allow us to buy modern assets with strong sustainability credentials and retrospectively improve the sustainability performance and credentials of properties in our existing portfolio.
Our experience is a good case study in how sustainable investing is driving markets and shaping behaviour. It should reassure those concerned about whether green finance is really making a difference. We firmly believe green finance is the way forward, and that before too long a discount will be applied to loans or bonds that are not green.
Understanding the standards
The Green Bond Principles and Green Loan Principles govern the use of proceeds raised by green bonds and have four core components.
Firstly, the way the proceeds are used must provide clear and quantifiable environmental benefits. There are 10 categories to be considered including climate change mitigation, natural resource and biodiversity conservation, and pollution prevention and control.
Secondly, the issuer must clearly communicate to investors these objectives and the process by which it intends to meet them.
Thirdly, the proceeds must be managed in a transparent way – credited to a sub-account or sub-portfolio, for instance, so lenders can easily track how the money is being used.
Finally, issuers need to make and keep readily available up-to-date information on the use of the proceeds. External auditing and review by ratings agencies is encouraged.
It is common for green bond issuers to align themselves with one or more of the UN’s Sustainable Development Goals. In our case, for example, we are focused on SDG numbers 8 (Decent Work and Economic Growth), 11 (Sustainable Cities and Communities), 13 (Climate Action) and 15 (Life on Land).
In simple terms, this means trying to build or develop healthy and sustainable buildings, achieving net-zero carbon emissions by 2030 and enhancing biodiversity and the wellbeing of all those associated with the buildings we own.
Since March this year financial market participants and financial advisers operating in the EU have been governed by the Sustainable Finance Disclosure Regulation (SFDR), which sets rules for the sustainability related information they need to disclose. These rules are expected to tighten over the next 18 months, with the objective of mitigating ‘greenwashing’.
Many assume that giant warehouses offer little to those seeking a more sustainable way of investing. They may be in for a surprise. Sustainability starts for us with developing properties that are close to large conurbations and which can meet a variety of tenant uses. Building close to customers can reduce delivery costs and carbon emissions for operators; flexible design makes them attractive to a wider prospective tenant base and increases their longevity.
Most logistics buildings are huge flat-roofed buildings. That makes them ideal for rooftop solar installations. Our current portfolio of 14 buildings has the potential to produce 10.5MW from solar power–enough to power as many as 9,000 homes.
Installing LED daylight-controlled lighting and other energy efficient technologies can significantly reduce power consumption.
In collaboration with tenants, we create a better working environment for staff. Most logistics buildings house an office area for desk workers. With careful forethought you can position this to capture the maximum natural daylight. Interior design can help, too – I have seen office space in some logistics units that is fitted out to higher standards than you would expect in central London.
On some sites we have created green break-out areas outside, with space for green gyms and areas to support wildlife and biodiversity. We can incorporate provision of cycles or electric scooters to enable staff to travel to and from work, and get around sites easily and efficiently, reducing carbon emissions, air pollution and traffic congestion.
We also install charge points for electric cars, scooters and electric forklift trucks and lorries and help tenants with the procurement of green energy.
Green roof spaces – where sedges and other plants are encouraged to grow – can support us on the way to our target of zero carbon emissions by 2030. This can help with rainwater management. At our Nuremberg site rented by German sportswear manufacturer Puma we have a 22,000 sqm green roof, and we also collect and use rainwater in the building.
Future proofing logistics real estate
We have embedded environmental, social and good governance (ESG) principles in the management of this fund since its creation. Most of our logistics warehouses have been built in the past five years and just over 60% (by sqm) currently qualify as Eligible Green Projects under our Green Finance Framework, with 94% of the assets in our pipeline also qualifying. This is measured on Green Building Certification and Energy Performance Certificate (EPC) criteria.
However, we need to keep raising standards across the portfolio and in turn future proof our assets because, I believe, buildings with& poor ESG performance will become increasingly hard to let and their values will consequently drop.
Obviously, this requires investment, but in our experience tenants are prepared to pay more rent for more sustainable buildings that protect them from ESG risks, such as climate change resilience, energy costs and staff wellbeing.
The reality is that most are themselves being incentivised by investors to satisfy ESG standards. They like sites that achieve high EPC and BREEAM scores – they offer tangible evidence of their own commitment to sustainability. And being green usually saves them money in lower energy costs.
In short, the ESG agenda is now incentivising us all to change. And as quickly as possible.
Nick Preston, Citywire Guest Writer
Nick is a partner at Tritax Group and fund manager of Tritax EuroBox