A recent article entitled “All Lenders must be green lenders” by friend and EnergyPro collaborator in the US Sean Neil emphasised an important aspect of green and energy efficiency financing that often seems to be forgotten and which we have been writing about for a while. This is how do we ensure that all lending is green, or in the specific case of energy efficiency, how do we all ensure all financing achieves the optimum levels of energy efficiency. This text draws upon the EEFIG Underwriting Toolkit and work I carried out for KAPSARC on financing energy productivity.
Every working day loans, mortgages, leases and investments are made into new buildings, building refurbishments and modernisation as well as upgrade and replacement of industrial processes and production plants. In nearly all cases, energy efficiency is not the primary purpose of the investment being financed but the future levels of energy efficiency are effectively being decided and “locked in”, in some cases because of the long life of major assets for many decades. Although new buildings, refurbishments or new production plants generally achieve higher levels of efficiency than the units that they replace due to a) improved technologies and b) tighter regulations and codes of practice, many cost-effectiveopportunities to improve energy efficiency are missed. This occurs due to a number of reasons including; lack of knowledge on the part of project hosts, time pressure, the conservative nature of engineering design, and treating regulations as a target that have to be achieved rather than a minimum level of performance. Banks and financial institutions can play an active role in ensuring financed projects of all types achieve optimum levels of efficiency over and above business as usual by adjusting the lending/investing process to include queries about energy efficiency and the provision of assistance to identify viable projects. By doing this they can both reduce risks, by financing measures that improve customers’ cash flows, and potentially increase lending.
The EBRD has long been a pioneer in exploiting the opportunities provided by everyday, non-energy efficiency lending activities. As well as specialised efficiency projects the EBRD checks all industrial or commercial loan applications to assess potential for energy efficiency improvements. The bank then works with the client organisation to develop the priority projects and these are incorporated into the loan application. This process ensures that all commercially and financially viable improvements are incorporated, improves the client’s cash flow (which reduces the lending risk) and increases the capital deployed.
In commercial real estate funding for the acquisition or refinancing of a building an investor or lender will typically review the building’s financials, rent roll and history and require a Physical Needs Assessment (PNA) or comparable review. It can be a relatively simple matter to make energy efficiency assessments and ratings such as Energy Performance Certificates part of that PNA, and even to make performance standards part of a lender’s requirements. Some banks including ING and ABN Amro have implemented these kinds of programmes and are going further by providing tools to assist owners to identify energy efficiency measures.
ING Real Estate Finance (ING REF) set an ambition of reducing CO2 emissions from its Dutch portfolio by 15-20% with a target of energy cost savings of EUR 50 million per year. This entailed targeting 3,000 Dutch clients with 28,000 buildings. ING paid for the development of an app which was offered to all clients – the app provides an analysis of the clients energy use across their portfolio and identifies potential energy savings. If the potential energy savings exceed EUR 15,000 the client is offered a free site energy survey.
ING REF also provides advice to clients on what subsides are available (through a specialist third party) and ING REF offers 100% finance for energy efficiency improvements from ING Groenbank with a 0.5% discount on normal interest rates. Within the first two years, the app was used to scan 18,000 buildings with a total floor area of 10 million m2 (65% of ING REF’s portfolio). ING aims to roll out the app to other European countries.
The important thing here is that, as Sean says in his article, just by making small adjustments to existing processes for lending and investing, banks and investors could have a significant effect on future levels of energy efficiency, as well as identifying additional opportunities to lend and to reduce risks. Banks and investors need to ensure all projects they back, in whatever sector they are, real estate, industry, infrastructure, transport or energy supply, incorporate all cost-effective energy efficiency measures. If they don’t they are aiding and abetting developers and operators to lock in unnecessarily high levels of energy waste for the foreseeable future, sometimes even for decades.