Debt and Energy Efficiency: The Elephant in the Room (?)

I recently gave a talk for the Environmental Bankers Association (EBA), and ex-ante, I was excited about the prospect of fierce debates with bankers about "green" financing. After all, if energy efficiency and/or sustainability factors affect the investment performance of real estate, then lenders should take these factors into account in their underwriting of assets. There might be an upside to green building, which will benefit the equity investors, but long-term lenders will be more concerned about the risk of "stranded assets," (to use the language of Al Gore and David Blood) following changes in building regulation (think about the UK, that wants to make it unlawful to lease out space rated with energy label F or G in 2018), carbon pricing, or even the fat tail risk of climate change events. Alas. I certainly did my part of the fierce debate, but the response was a little muted. For (mortgage) lenders, pricing risks related to energy efficiency seems to be a big challenge, which leaves the most important part of the capital market with a neutral stance towards energy efficiency projects. Oh sure, Wells Fargo will make big claims related to financing of "green" real estate projects ($6.4bln in 2012 alon), but ask them whether factors such as LEED or Energy Star play a role in the underwriting, and the sound of silence will fill the room/phoneline.

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Author: Nils Kok