Financing Green Buildings

Around the globe, buildings account for 28 percent of energy-related greenhouse gas (GHG) emissions. Meeting the goals of the Paris Accord to limit global warming to an increase of 1.5 C will require practice changes in the building sector.

New buildings must be energy efficient, and many existing buildings must be retrofitted to use less energy.

There are significant opportunities for investment in green buildings. Building space, as measured by floor area, is expected to double by 2060, with most of the growth in residential construction, particularly in middle-income countries.

IFC estimates a need for $24.7 trillion in green building investments by 2030, with $881 billion needed in Europe and Central Asia (ECA).

 

According to an IFC report, 25 percent of this investment will be needed in the commercial sector, with the remaining 75 percent put to use in the residential sector. Investments needed in the housing sector are significant, with $201 billion required for multi-unit residential buildings and $460 billion required for single-unit family homes in the ECA region.

Retrofitting existing homes is also key to reducing GHG emissions, as most buildings that are in place today will still be in use in 2050. IFC estimates that, to reduce emissions from the building sector to meet the goals of the Paris Accord, three to five percent of existing buildings must be retrofitted every year until 2050.

 

IFC’s Green Banking Academy in Europe and Central Asia (ECA GBAC) is an online banking knowledge initiative designed to help financial institutions in ECA learn about green banking and build green portfolios. Financing the construction and purchase of green buildings is an important component of green banking. GBAC advisory services are available to help financial institutions identify green buildings, measure and report on reductions in GHG emissions, and develop new financial tools to finance green buildings.

 

 

Reasons to Build Green

 

Along with lower GHG emissions, green buildings offer financial benefits. Though up-front construction costs may be higher than those of conventional buildings, green building tenants and owners can expect lower operating costs. As estimated by IFC, on average, green buildings use 20 to 40 percent less energy and water than conventional buildings, resulting in savings of 15 to 20 percent on utility bills.

 

Tenants are eager to work and live in green buildings. In the commercial market, resale prices are 10 to 31 percent higher for green-certified buildings; green residential buildings have seen retail prices four to 10 percent higher than conventional homes.

 

Certified green buildings have been shown to attract rent premiums eight to 25 percent above conventional buildings, with occupancy rates up to 23 percent higher.

 

 

Real estate analysts are beginning to change the terms of this conversation from a “green premium” to a “brown discount,” where buildings that are less energy efficient are seen as less valuable.

 

Municipal and national legislation may also benefit owners of green buildings. Some jurisdictions offer tax incentives to build or occupy green buildings. Owners of certified green buildings are less likely to face future taxes or fines from more stringent building codes or new emission caps. Green buildings are more resilient to a changing climate, as the impact of increased heating or cooling needs will be minimized. Finally, insurance companies in some areas offer discounts for owners and tenants of green buildings.

 

The perception that up-front costs of green construction will be significantly higher than that of conventional buildings is a key barrier to the development of green buildings. IFC has found that although the perceived additional cost of developing green buildings is 30 percent higher than conventional buildings, the actual additional cost of green buildings typically ranges from 0.5 percent savings to costs that are 12 percent higher than conventional buildings.

 

“Green buildings are an investment opportunity that teaches us the better the quality and sustainability of the project, the better the investment can become.”

Alzbeta Klein

IFC’s Director and Global Head of Climate Business

 

Defining Green Buildings

 

IFC defines “green buildings” as buildings that are:

  • Certified under an internationally recognized standard;
  • At least 20 percent more energy efficient than a baseline building of similar size; and,
  • Equipped with technology that enables monitoring and reporting of impact metrics such as energy and water use.

 

There are a variety of national and international green certification standards. Some of the most common methods are:

  • BREEAM: “Building Research Establishment Environmental Assessment Method” was developed in 1990 by the Building Research Establishment in the United Kingdom.
  • LEED: “Leadership in Energy and Environmental Design” was developed in the United States by the U.S. Green Building Council in 1993.
  • EDGE: “Excellence in Design for Greater Efficiencies” is an online platform launched by IFC in 2014.
  • The Three Star System: This Chinese system is based on the Chinese Ministry of Construction’s Green Building Evaluation Standards and was introduced in 2006.

 

IFC’s EDGE Certification was developed to provide developers, buyers, lenders, renters and investors with certainty that new or retrofitted buildings are truly “green.” EDGE is currently in use in 170 countries to certify all types of buildings including homes warehouses, hotels, offices, schools, and light industry. The EDGE app calculates the carbon footprint and utility savings associated with each certified building.

 

There are three tiers to EDGE certification.

  • EDGE Certified buildings meet the EDGE criteria of 20 percent savings in energy, water, and embodied energy in materials as compared to a conventional building.
  • EDGE Advanced buildings offer 40 percent savings in energy reduction.
  • Zero Carbon buildings must meet the standards of EDGE advanced and use 100 percent renewable energy and carbon offsets.

 

“Our global certification providers will build capacity and volume to seize the window of opportunity that lies before us. The power and potential for EDGE with its speed, simplicity and rich data is now in their incredibly capable hands.”

Prashant Kapoor

IFC’s Principal Green Building Industry Specialist, Inventor of EDGE

 

Financing Green Buildings

Green buildings offer several opportunities for financial institutions. Financing is needed for construction, mortgages, and home improvement loans. Investing in green buildings offers banks an opportunity to expand their client base, build green portfolios, and access liquidity through green bonds. The Global Real Estate Sustainability Benchmark (GRESB) has developed Green Bond Guidelines for the real estate sector.

Financial institutions can develop specialized products to finance the construction and purchase of green buildings. These products could be linked, for example where loans are provided to construct a multi-unit residential building, mortgages could be offered to buyers of units in the same building. Banks with a portfolio of green building loans can issue green bonds to increase liquidity. Certified green building loans in a financial institution’s portfolio can be tracked using IFC’s CAFI (Climate Assessment for Financial Institutions) tool, which is available to IFC clients.

 

 

Green Buildings in Europe and Central Asia

 

In Iasi, a city in northeast Romania, the Romanian company Iulius Holding is constructing a mixed-use complex with 60,000 square meters of leasable space with the help of a loan from IFC. This building will house information technology and communication businesses, as well as co-working spaces and a food market. Access to new green office space will help Romania attract and retain foreign investors and businesses, and also contribute to urban development in central Iasi. The new development will be EDGE certified, resulting in emissions 20 percent lower than a similar-sized conventional building.

 

The German-based Schwarz Group has made efforts to reduce the carbon footprint of its retail food stores in ECA. Schwarz Group has obtained EDGE certification for 36 of its Lidl retail stores in Lithuania, 89 stores in Bulgaria, and all of its stores in Romania. An additional 48 of Schwarz Group’s Kaufman stores in Bulgaria and one in Romania have also been EDGE certified. The company plans to certify more of its retail buildings in the future. IFC calculates that the additional costs to Kaufman to have its stores meet EDGE certification have averaged $100,000 per building. The cost of the investment will be offset in two years, as monthly energy bills for each store decrease an average of $4,000 per month.

 

“There is no alternative to sustainable action. We are confident that, as a large company, we can make a real difference. We take this responsibility seriously and therefore align our actions to the group-wide sustainability strategy with ambitious objectives.”

Gerd Chrzanowskil

General Partner, Schwarz Group

 

Start Your Green Journey

For more information about the IFC ECA Green Banking Academy or to schedule an assessment of your climate capabilities, please email ecagbac@ifc.org to contact a member of our team. We are looking forward to working with you. Stay green!