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IPE special report May 2018

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Climate bond standards aim to attract institutional investors

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Climate bonds backed by property should be barred from drawing returns from more than four-fifths of the real estate market, according to draft standards.

The Climate Bonds Green Property Working Group has proposed that buildings used for Climate Bonds should be within the top 15% of their regional market and able to achieve “deep cuts” to carbon emissions.

The standards – covering commercial and residential property, as well mortgage-backed securities and finance schemes that would reduce emissions within buildings – aim to increase the scale of all green property initiatives to attract institutional investors “needed to drive significant improvements in the building environment”, the draft said.

Sean Kidney, chief executive of the not-for-profit Climate Bond Initiative, said the cuts to a property’s emissions were needed if “catastrophic” climate change were to be avoided.

“These new rules help investors identify green bonds that make a difference from paler green bonds, where the ambition levels are too low to make a real contribution to tackling climate change,” he added.

Hermes Real Estate’s head of responsible property investment Tatiana Bosteels, also chair of the Property Working Group of the Institutional Investor Group on Climate Change (IIGCC) said there was a “huge opportunity” to unlock the potential for energy efficiency within the real estate market.

“But to do this effectively and at scale will require more confidence in the tools, standards and models available to measure green buildings and their financial performance.”

The 16-strong working group includes a representative from the European Commission’s Joint Research Centre; Brian Rice, lead investment officer in the corporate governance department of the $183bn (€133bn) California State Teachers’ Retirement System; and Simon Brooker, executive director at Australia’s state-backed Clean Energy Finance Corporation.

It said it imagined climate bond opportunities would stem from green mortgage-backed securities in countries where building codes met the requirement of the standard, but also from opportunities to finance improvements within the existing stock as long as these would achieve a 50% or higher emissions reduction.

Kidney added: “In the long run, we expect green property and urban improvement bonds to be more than 50% of the green bonds market.

“But this will depend on confidence among investors that the buildings are making a genuine contribution to the transition to a green economy we need to head off catastrophic climate change.”

The standards will now be put out to consultation and then submitted to the Climate Bond Standards Board for confirmation.

The working group cited New York, Toronto, Tokyo, Sydney and London as cities targeted for an initial rollout of the standard due to the high volume of property already within the top percentile.

A number of pension funds have committed to reducing the carbon footprint of buildings, with the UK’s Environment Agency Pension Fund and the Clwyd local authority scheme last year investing in the Threadneedle Low-Carbon Workplace Trust.

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