How green finance bridges the gap between ESG policy and construction practice

If we needed any proof that climate change has shifted to the centre of financial sector strategy, we need look no further than the rise and rise of green or sustainable finance as a capital source. ESG (environment, social and governance) is now mainstream across global property, investment, insurance and corporate strategy, and climate change adaptation and mitigation is one of the main areas where ambition is being matched by action.

We see this as the result of climate change having direct impacts on nations and communities – heatwaves, wildfires, catastrophic flooding, sea level rise and more frequent and more intense storm events have been causing damage, loss of life and hardship in many countries around the world.

Green and sustainable finance makes action to address climate change a priority by providing the necessary financial resources for achieving sustainability outcomes to businesses, developers, asset owners and public bodies such as local governments.

It ensures results are achieved by having clear definitions of the types of activities that can be funded. For example, the Hong Kong Construction Industry Council (CIC) commissioned Cundall to help develop a Sustainable Finance Certification Scheme (SFCS). This scheme gives developers, builders and other industry participants clear guidance on the types of finance available and what kind of evidence an applicant will need to provide to obtain it. The scheme also defines what types of finance are available for 10 different categories of activity, project or asset.

The categories include:

• Renewable energy
• Energy efficiency
• Pollution prevention and control
• Environmentally sustainable management of living natural resources and land use
• Terrestrial and aquatic biodiversity conservation
• Clean transportation
• Sustainable water and wastewater management
• Climate change adaptation
• Eco-efficient and / circular economy adapted products, production technologies and processes
• Green building

The types of financial instruments that will be most beneficial for an applicant do depend on the nature of the end use.

Green loans for example are suited to green buildings, development of renewable energy assets, clean transport infrastructure and for some cases, such as a product manufacturer, circular economy product development. They are generally obtained by the party responsible for making a development or initiative happen, much like green bonds or climate bonds are often obtained by a party such as a municipal authority, or a not-for-profit agency or a government to fund a tangible program of works or a program with high social value outcomes and specific, measurable and time-bound goals to achieve them.

Sustainability-linked loans (SLL) are often obtained by applicants who hold a portfolio of existing assets they plan to upgrade, for example through deep energy efficiency retrofit or electrification with renewable energy procurement.

What green finance has as a common characteristic is the applicant’s proposal needs to have tangible goals and measurable outcomes and then there is often a contractual requirement to verify the goals have been attained. This is critical, to ensure green finance is not seen as ‘greenwash’.

The CIC SFCS, for example, has clear requirements for evidence. This protects the reputation of the applicants, and it also protects the reputation of the finance provider and the wider scheme itself.

For an SLL, there is a significant element of ESG in the outcomes required. They applicant might identify milestones they are targeting such as emissions reductions, supply chain improvements such as waste reductions or water consumption reductions, and these must be met as part of the conditions of the loan. The interest rate is often linked to progress and verification.

We have seen clients finance the achievement of quite significant sustainability gains through these financial instruments, with quite ambitious targets and clear incentives for achieving them such as interest rate reductions at specific milestones.

The other benefit of the SLL is it can create a framework and give direction to businesses that may have been unfamiliar with how to translate sustainability ambition into concrete actions.

Goals that are set might include short-term specific goals, or a Science-Based Targets Initiative approach that sets a medium-term trajectory for reaching net zero in a series of steps. Others might develop a comprehensive strategy that incorporates multiple initiatives across a range of sustainability criteria with short-term, medium-term and long-term targets supported by multiple rounds of green finance procurement.

Overall, we are seeing that the push for green finance is coming from both sides of the counter, so to speak. Clients are looking to position themselves as leaders in ESG, while banks and other financial organisations are seeking to gain customers for green finance products by identifying key advocates and business sectors and reaching out to them.

This is having a ripple effect throughout the property value chain, which is part of the ambition that CIC had when it worked with Cundall to develop the Sustainable Finance Certification Scheme. When a developer obtains green finance for a highly sustainable building, they have to consider the supply chain for that building in order to achieve the required outcomes.

That means the suppliers including builders, trades and product suppliers have to consider the sustainability performance of their own downstream supply chain. This is helping the entire construction industry gain an understanding of what sustainability means and how to achieve it in practical ways. It goes beyond statements of intent to the tangible ways it can be demonstrated in outcomes.

In this sense, green finance is acting like a bridge that translates between the finance sector and its growing focus on ESG and the development and construction sector that must deliver it in built form.