Green bonds and green financing move further up the agenda

It's green whichever way you look these days, as banks and real estate companies pull out all the green stops to ensure their bonds are taken up or their lending programmes are smoothly refinanced. 

Both of Germany's biggest listed residential housing companies - Vonovia and Deutsche Wohnen - recently issued their first green bonds to pursue their sustainable investments. And investors have been seemingly happy to sacrifice a premium on the bonds, even though they've been longer-dated than the market has been used to recently, with investors more focused on shorter-dated issuance.

Deutsche Wohnen's inaugural green bonds were two issues totaling €1 billion, the first one a 10-year €500m bond and the second a 20-year bond, also for €500m. Deutsche Bank and UBS, as joint global coordinators, and BNP Paribas, Goldman Sachs, JP Morgan and UniCredit as bookrunners set the spreads on the two bonds at 60bps and 98bps respectively.

The proceeds from the bonds are coupled with Deutsche Wohnen's green bond framework of investing in green buildings, renewable energy and clean transport. The company said it is making good headway in improving the energy efficiency of its properties. 

Sustainalytics, the ESG-rating subsidiary of Morningstar, gave a second opinion on the bond issue, saying that of Deutsche Wohnen's total building stock, 62% was now performing above the average energy efficiency of German residential buildings by the end of 2020. It mentioned the company's overall target of annually reducing CO2 emissions from its operations by 20,000 tonnes, as well as increasing its reliance on renewable energy sources and increasing energy efficiency through refurbishment.

Larger rival Vonovia also announced that it issued its own first green bond, raising €600m. The fund raising is part of its recent commitment to a 'binding green path for a virtually climate-neutral building stock by 2050'. The 10-year bond was five times oversubscribed, and is paying 0.625% interest annually.

According to Helene von Roeder, Vonovia's CFO, "We have been systematically reducing the carbon footprint of our buildings from the 50s and 60s since 2015 through energy-efficient modernization. Our new-build program is also highly energy-efficient." 

"Green bonds are a future-oriented addition to our financing strategy that we can already use today to further expand our investor base. Vonovia plans to use the additional liquidity to refinance sustainability projects in Germany, Austria and Sweden. These include investments in buildings - for example, through new construction or modernization projects that lead to higher energy efficiency and that were initiated within the last 36 months. Other investment projects include renewable energy - for instance, generating solar energy through additional photovoltaic installations."

Vonovia recently introduced its own Sustainability Performance Index (SPI), which incorporates all the ESG elements, including climate change, and social components such as customer and employee satisfaction and diversity. At the upcoming AGM in April the company plans to demonstrate how the board and top management's compensation will be directly tied to meeting its SPI targets.

Banks and other financing institutions have also been making a big play for the 'green lending' segment of the overall real estate financing market. Leading the charge is Berlin Hyp, which, like landlord Vonovia, has set itself a demanding sustainability agenda and accountable targets for its financing of energy-efficient and resource-saving properties.

Berlin Hyp CEO Sascha Klaus said recently at the presentation of the bank's annual figures, "At the end of 2020 the share of green loans in our loan portfolio was 23%. We aim to increase this to 33% by 2025. We are already the European bank with the highest volume of green bonds issued". 

By 2025 the bank is also targeting complete transparency on the entire range of climate performance and climate risk on its loan book, and is collaborating with consultancy group Drees & Sommer to implement the reporting system.

In the middle of February Berlin Hyp issued its thirteenth benchmark green bond, or those with a minimum issue volume of €500m. The bank is taking a more cautious approach to lending in the current climate. Last year it wrote €6.7bn of new business, about €600m less than in 2019, with this year's figure expected to be down further still. Office will still remain the favoured asset class, but Klaus said that residential, logistics and grocery-anchored retail were also well-viewed. The bank has been well served by its traditional mix of asset lending, he said.

The bank is beta-testing a new instrument called a Transformation Loan ("Transformationskredit") which is an entry-level loan for financing green assets. Klaus explained that the product was designed for building refurbishments which would not fully qualify as 'green' under the new EU taxonomy criteria.

Much of the pressure on the banks to trumpet their green credentials is coming from investors keen to comply with the full cycle of ESG best-practice and the Green Asset Ratios as recommended by the European financial supervisory authority EBA. In the absence of firm laws written in stone, companies are orientating themselves around the Green Loan Principles issued by the Loan Market Association (LMA) when formulating the exact wording in their contracts. 

This still leaves a certain amount of leeway for interpretation as to what constitutes a 'green' loan. Experts don't believe, for example, that just financing a property with a green building certificate like LEED or BREAMM means that the loan is a 'green' loan. Various parties are working to create a 'standard' on which everyone can agree and work towards to lower the degree of soft ambiguity which can still prevail in the world of 'green' financing.

Of course, not all lending is going to have to be 'green', just as not all buildings will be 'green' in future. But there will be clearer differentiation between the classification of assets, and a clearer demarcation of what will be financed by what kind of loan, as the whole 'green' and 'sustainable' investing environment moves forward.