River or a rock?A few weeks ago, a senior manager of one of the largest South African banks commented “we banks are like timber logs floating in the river--we go with the flow to where the business is”. The evidence suggests that the flow of the river is changing toward green construction finance. Governments are attempting to make conducive policies. At the first-ever at the Paris COP21, both the public and the private sector made ambitious commitments. Over 90 countries have included the need to focus on buildings in their Nationally Determined Contributions (NDCs). It is clear that not only will the public sector have to take a leading role to act on this, but so will the private sector solution providers. [also see my earlier blog Green Buildings in Emerging Markets: Where are they likely to Succeed?]
Big challenge, huge opportunityIEA estimates that the building sector alone needs an additional investment of up to US$296 billion each year if average global temperatures are to be capped at two degrees. This is in addition to the $358billion that already goes into the sector annually.
|Global impact of buildings|
From a business perspective, it also makes a lot of sense, as it allows banks to present a new offer for current clients and reaching out to new clients. It offers possibilities for cross-selling i.e. green construction finance to developers and green mortgages to home buyers. And finally, energy efficient assets create a stronger portfolio – as data shows owners of green homes have lower delinquency rates.
|Value proposition for banks to offer green building finance|
What's hindering the market from responding to demand?
What comes first- demand or innovation?In the real estate sector, commercial banks already play a crucial role by providing financing to developers, mortgages to homeowners, or providing insurance solutions. The exciting thing about green buildings is that the investment and financing for the construction industry already exists. The challenge is to incorporate the additional upfront costs for resource efficiency into the financing.
There is evidence that these can be paid for by the increased savings as a result of operational cost reductions, better credit ratings, and higher resale value of the green buildings. Banks need support to create new products such as green construction finance, Green Mortgages, Risk Share Facilities and secularization of green building loans as collateralized bonds i.e., Green Bonds. Banks are concerned about the required added resources to develop new products, train staff, and convince their management to take perceived risks if there is no reliable availability of green buildings stock. This is why it is important that both supply and demand aspects must be looked at simultaneously – building green stock while securing financing.
|The market for green building financing can take off quickly with the right incentives|
Case Study 1: INFONAVIT Green Mortgage ProgramA green mortgage program was developed in 2007 by the Institute for the National Workers’ Housing Fund (INFONAVIT) in Mexico to encourage the use of energy efficient systems and technologies for low-income households. Families purchasing homes through the bank received an extra credit of up to US$1,250 to cover the cost of green-technologies (these are quality assessed and controlled by third-party auditing agency).
Infonavit has more than 70% of market share in the Mexican mortgage market, it is the largest player in terms of assets (with a loan portfolio of almost $70bn).
Over time, the product became extremely popular and mainstream especially for low income housing finance. By 2011, 75% of all originated home mortgages were green. In 2014, Infonavit decided to issue only green mortgages. Their market share has also increased significantly (~12%) during the period. The bank has granted over 1,000,000 Green Mortgages, benefiting over 3 million people.
|Green Mortgage system used by ODEA and PNB using EDGE certification|
Case Study 2: INDIA: KfW NHB-EE credit line for housing developersIn 2010, KFW extended a re-financing line to National Housing Bank (NHB) of €50 m. Almost no green stock was present in the market at the time of launch, yet within 1.5 years (ahead of the planned 3 yrs) the mortgages were distributed and the line exhausted. 21,000 housing units were developed through the program.
Case Study 3: INDIA: PNB Green Construction Bond
Lead or play catch up time for banks
However, there is little excuse for inaction. Especially now, with platforms like EDGE, the existing capital flows into new buildings can be reworked to fund green designs. A CEO of one of the largest banks in India recently said “fundamentally, it boils down to whether we really want to fund these developments which will ruin our built environment- that we and our families live in?-we banks have to show leadership by setting higher expectations”.