9th March 2022
Banks and lenders are increasingly placing emphasis on the green credentials of schemes they are asked to fund. Here’s why sustainability is more important than ever for development of land projects.
It is reported that the built environment accounts for up to 40% of carbon emissions in the UK. In arriving at that figure, we no longer think only about the energy used to heat and light buildings each day.
We are also encouraged to consider the environmental impact of “embodied carbon” in developments – the emissions produced in making each concrete foundation, brick, girder and roof tile, bringing them to site and putting them together to create buildings.
This all means that sustainability is increasingly becoming a driving factor for all aspects of development of land projects – including how they are funded. This has given rise to the term “green” or “sustainable finance” – shorthand for the growing emphasis on environmental responsibility that weighs upon lenders and, in turn, on the developers they fund.
In its 2021 Climate Change Adaptation Report, The Financial Conduct Authority calls upon banks and lenders to “bring about societal benefits by accelerating the transition to a net zero emissions economy”. This reflects how important environmental responsibility has become for investors and developers alike, and supports the government’s ambitious commitment to achieving net zero carbon emissions by 2050.
We are currently seeing sustainable finance in two main forms. The first is a straightforward “green loan” used for environmental projects that are net zero emissions, or even of net benefit to the environment.
The second, often referred to as a sustainability-linked loan, funds a development with incentives to the borrower to make their project as green as possible. This means developers who commit to more sustainable projects can find lenders are more likely to offer favourable terms.
There are a number of principles and guidelines around this type of lending, although none of them are defined in law. These include the International Capital Market Association Green Bond Principles, and the Loan Market Association Sustainability Linked Loan Principles.
These guidelines are likely to become more entrenched in lending and in the future we may see lenders insist on commitments to certain elements of social responsibility as a condition of any loans or offering more favourable terms to those able to offer such commitments. However, it is yet to be universally agreed how these commitments will be monitored and measured.
authorities should allow or refuse. The growing need to factor in a development’s green credentials at the financing stage will run tandem to this – making it more important than ever that developers keep the future of the world around us at the forefront of their minds at every stage.
The experienced team at Thrings are specialists in wide-ranging and complex finance arrangements for developers, with deep commercial insight and knowledge of commercial and residential schemes.