IEA 2019 statistics show that investment in buildings totalled US$139 billion in 2018, a 2% decline from 2017. The reason for this slowdown is the slowdown in investment within the EU, although the US and China continue to invest in more energy efficient buildings.
In Europe, governments are either limiting investment expansion, as in the UK and France, or cutting back on investment expansion, as in Germany. In contrast, overall real estate investment in China has grown by 6% per year since 2015 to over US$1.8 trillion in 2018. Investment in China is focused on residential construction, with investment in energy efficiency increasing to US$27 billion in 2018, a 33% increase from 2015.
In the US, investment in residential and non-residential construction grew at a 3.8% rate from 2015-2018 to $1.4 trillion, but investment in energy efficiency in buildings decreased by 2% as a percentage of total investment in 2018. The real estate market continues to embrace and invest in green buildings, and their overall environmental, social and corporate governance (ESG) scores continue to rise.
To boost the global volume of low-energy and low-carbon buildings, many countries and regions have been introducing green finance to promote green development in the sector through green finance policies.
The European Parliament has recently adopted new legislation on sustainable investment, defining six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
Establishing clear European ‘green’ criteria for investors is key to raising additional public and private funds to enable the EU to become carbon neutral by 2050 and to prevent ‘greenwashing’, as set out in the European Green Deal.
The European Commission estimates that Europe will need additional investment of around €260 billion per year to meet its 2030 climate and energy targets. The European Commission has established the Technical Expert Group on Sustainable Finance (TEG) to assist it in developing an EU green bond standard, benchmarks for low carbon investment strategies and guidelines for improved corporate disclosure of climate-related information. In addition, financial institutions, including the Bank of England and the European Central Bank, are increasingly pressuring financial organisations to include climate risk in product pricing criteria. The rise of sustainable investment and green finance will be a common theme across all markets.
In Europe, financial institutions are putting pressure on real estate to better understand the financial risks associated with carbon emissions and climate risk in buildings, and to make this a criterion for loan approval. Loan applicants with poor energy performance are subject to more stringent approval and terms from financial institutions. Companies with lower climate risk factors and greater sustainability will enjoy more favourable policies.
The EU Green Label is the first time that European Green Finance has provided advice on financing near-zero energy buildings (nZEB) buildings and green renovations. According to the European Unlisted Real Estate Investment Association (INREV), new investment financing in real estate totalled more than €200 billion in 2019, reaching the highest level ever.
On 20 May this year, the European Building Performance Institute (BPIE) published an analysis of economic opportunities in the European construction sector. According to the report, the total public funding required to trigger a significant increase in the speed and depth of renovation will total €90 billion per year by 2050, of which €76 billion per year will be allocated to support building renovation, with a further $14 billion per year available in the Innovation Fund to expand the series of building renovations on an industrial scale, while the total annual investment in the deep renovation of European buildings is expected to be 243 billion euros.
The European Commission is currently planning a €1 trillion economic stimulus package. The EU Commissioner for Energy, Kadri Simson’s strategy for a “wave of building innovation”, which is considered a priority for economic recovery, will be launched in September this year.
The ASEAN Capital Markets Forum (ACMF) released its Green Bond Standard in November 2017. The Standard, revised in October 2018, is based on the Green Bond Principles (GBP) and is designed to meet the needs and commitments of ASEAN. The “Standard” label applies only to issuers and projects in the region and specifically excludes fossil fuel-related projects.
The ACMF continues to focus on sustainable finance and launched the ASEAN Social Bond Standard and the ASEAN Sustainable Bond Standard in October 2018.The ACMF has published documents to align sustainable finance with the Sustainable Development Goals (SDGs) in December 2018. For example, Malaysia has implemented the ASEAN Standard and the SRISukuk framework. As another example, the Securities and Exchange Commission of the Philippines approved guidelines for the issuance of green bonds under the ASEAN Green Bond Standard, which aims to adopt the ASEAN Green Bond Standard and sets out the rules and procedures for issuing ASEAN Green Bonds in the Philippines.
Brazil’s 2016 Brazil Green Bond Issuance Guidelines are intended to provide advice to participants in the Brazilian fixed income securities market on issuing green bonds and are also intended to contribute to the development of the market in the country.
Japan’s Ministry of the Environment developed the Green Bond Guidelines 2017 on 28 March 2017 with the aim of encouraging the issuance of and investment in green bonds in Japan.
According to data from the Climate Bonds Initiative, a total of US$250 billion (approximately RMB18,000) of green bonds were issued globally throughout 2019, with energy and buildings remaining the main investments, accounting for 31% and 30% respectively. It shows the vigorous vitality and development tension of green bonds, highlighting the advantages and prospects of green development in the real estate and construction industry.
Currently, green development-related topics are mainly focused on new buildings. The reality, however, is that the urban built environment in 2050 will not be very different from today, and most of the buildings in use in 30 years’ time will be those already in place today. Renovating older buildings to achieve energy savings and even near-zero emissions is more challenging.
One of the most important aspects of achieving near-zero emissions from buildings in the real estate construction industry is to obtain reliable information and to ensure that this information is available to all parties involved. There are a number of buildings around the world that have achieved some form of green certification, but these represent a very low percentage of the local market. The market for green, sustainable buildings has huge scope for growth.
At the heart of green development and investment is information disclosure, and more than 30 countries and regions around the world have now established environmental, social responsibility and corporate governance (ESG) disclosure systems for listed companies. Information disclosure requirements are gradually moving from “encourage disclosure” to “explain if not disclosed” and “mandatory disclosure”, and are committed to establishing more quantifiable indicators.
Although there has been some progress in annual reporting and sustainability disclosure by real estate and construction companies, the information disclosed remains inconsistent and incomplete. The result is that it is difficult to ensure that ESG risks are captured accurately. Inadequate disclosure makes it difficult for ESG ratings to be considered equivalent to financial market data, for which disclosure is structured, consistent and mandatory. Unless there is a regulatory mandate from government departments, corporate reporting and sustainability disclosure focused on ESG issues will continue to lack consistency and completeness.