What is the future of green finance?

To find out, Property Week sat down with Jessica Tomlinson, head of real estate, London, at Barclays, a lead partner in Property Week and UKGBC’s Climate Crisis Challenge, to discuss the ins and outs of green lending and what the future holds for it.

What are you seeing in the funding market at the moment from private debt capital and DCM markets?

I think we are seeing incredibly strong growth in both green and sustainably linked debt issuance in 2020 and 2021.

This is happening globally, across many sectors, but with real estate very much on that journey as well.

To set the scene: globally, green and sustainably linked loan issuance stood at £188bn in the first half of the year, with real estate businesses making up 40% of that issuance.

I think this is an extremely positive trend, as it demonstrates that despite the pandemic, and the very real pressure that has put on real estate businesses, the industry is continuing to focus on making a real difference on the sustainability agenda.

A lot of green finance is being accessed by massive institutional players, but what about the smaller end of the market? What’s realistically available to SMEs from a green lending perspective?

This is not about the fact there are not products available, because I think there are a proliferation of products available now for clients. There is appetite for lending at the moment. There is strong debt capital availability for real estate.

So, really, what holds clients back is articulating very clearly what they are doing. Whenever we sit down with clients and talk about this at Barclays, what we tend to start with is how the client is doing on understanding the data with respect to its assets that go to energy efficiency and carbon performance. What is the client’s viewpoint on what it needs to do with its assets to meet the challenge of net zero? Is that articulated?

Do they have an asset level plan?

Once a client goes down that journey and starts to work through what it needs to do to its assets, where it needs to invest and, indeed, whether it needs to divest or buy differently — once that kind of strategy emerges, that is when as a funder you can help the client work out how you are going to be able to help them finance those changes that they are looking to make.

The industry is focusing on making a real difference on the sustainability agenda

And so for SME clients, it is about helping clients have the conversation about the journey they need to go on. A huge focus for us at Barclays in the last year or so has been having those conversations with clients.

And just as the big institutional players are moving forward, so many of our smaller and private clients are moving forward on this agenda at pace.

There is a shortage of professionals and tools in this space at the moment. How do you overcome that?

Every time I meet professionals who do sustainability as part of their role, people are always telling me how they are moving. There is a lot of movement in the job market in that area. People with this skill set are really in demand, and that just goes to underline the issue you are talking about.

We are not going to be able to assess every client portfolio that needs to be assessed at the pace we need to go at if we are just relying on growing that base of human beings. So, what I am really interested in is some of the innovations that are happening in the tech space where people are looking at data solutions to help clients understand how their portfolios are performing today and what they can do in the future.

What will happen to the businesses that do not get on board with green finance? There is a lot of talk about a ‘green premium’ in the upper end of the market, but is that something that also happens in the SME end of the market?

Obviously, at the top of the market, with Cat A office space, you are going to see sustainable fundamentals of buildings being very key to how those buildings then perform because that is what occupiers want. We have got that today. In certain parts of the market, we will not be talking about ‘green premium’. We will just be talking about the buildings that do well and the buildings that do less well because they cannot meet the client demand.

Once you get out of that Cat A environment, the conversation becomes more nuanced because you will not necessarily be dealing with occupiers who are all driving at the same speed, so it will take longer for these issues to flow through to valuation. But where you will see a driver is regulation changes. You can already see that anecdotally. You can see that as the regulation is changing, or the prospect of increased regulation is changing, that is making owners of assets think deeply about whether they can take those assets on the journey or not, and then making decisions.

Different parts of the market will go at different speeds in terms of when and how a ‘brown discount’ if you like is manifested. But the key message is absolutely over the long term in all asset classes that will start to bite.

How do you see green real estate finance evolving over the next year or next three to five years? Is it something that is going to become mainstream? And what does mainstream look like?

I think we are only going to see the use of sustainable and green debt products grow in the next few years. The products themselves will further diversify as they seek to meet more particular client needs or sector needs.

One area where I think we will see real innovation is in products that are not about rewarding buildings with good sustainable credentials today but helping buildings transition to those credentials. The retrofit challenge is huge – the oft-quoted stat is that we have 80% of the buildings we will need in 2050 – and we will see more lenders seeking to address that.

We might see instruments that look at particular things like development, which clearly comes with its own challenges, when we think about net zero. So, we will probably see more product proliferation, more specialised products and we will certainly see it become more and more mainstream.

What is the one thing companies can do to access green finance now if they want to start on that journey?

Be able to articulate your story about your green strategy with respect to your assets, have your data ready and be able to marshal and demonstrate your data.