18 Oct 2017
Lloyds Banking Group launched the first-of-its-kind initiative to support clients to reduce CO2 emissions from their real estate assets in March 2016. With the built environment responsible for almost 40% of energy consumption, as well as 36% of carbon emissions in the UK, incentivising and supporting green improvements for real estate clients is a priority area for Lloyds.
They launched their Green Lending Initiative as a key part of their Helping Britain Prosper campaign, and a commitment to be a responsible lender, which includes providing help to address environmental and societal challenges around energy and climate change.
As we point out in our Global Status Report, the built environment is a big contributor to global GHG emissions and more than a third of global energy is consumed in buildings and construction. Lloyds is a supporter of organisations like RICS who are raising awareness of what is required to keep global temperature rises to below 2 degrees celsius.
Lloyds' Green Lending Initiative in focus
Their initiative incentivises and supports borrowers to improve sustainability. Sustainability improvements can protect against obsolescence and value loss, thus reducing risks to borrower and a lender alike. It also usually translates into lower operating and maintenance costs, and a product that is more attractive to occupiers.
A priority for Lloyds is to deepen their understanding of the sustainability risks within their loan portfolio and encourage borrowers to collect environmental performance data. This is important to improve market transparency and the evidence base that better performing buildings are also performing better financially.
Lloyds’ concept for the Green Lending Initiative involves putting an incentive, namely a margin discount of up to 20 basis points, into the loan agreement. This is linked to sustainability covenants that the borrower is required to deliver.
Sustainability covenants are things that the borrower commits to do in the loan agreement, for example to reduce energy intensity in their buildings, to spend capex on green initiative or to manage the buildings more efficiently and engage tenants on sustainable behaviors. They also always include the borrower with providing Lloyds with energy performance data.
Lloyds is looking to support all sorts of sustainability strategies, including those that are aimed at reducing sustainability risks in underperforming assets. So both rewarding green and also supporting a trajectory to greener.
Evolving sustainability in lending practices
Following Lloyds’ example, a number of other lenders are also taking active interest in evolving sustainability in lending practices. These are taking various forms and there are different concepts of what a green loan looks like across the UK and European loan markets. Lloyds has already led a syndicate of banks in a large multi-bank facility that was underpinned by the model of its Green Lending Initiative.
We're also taking a leadership role, such as in the EU Commission-supported Energy Efficient Mortgage Action Plan which drives a broad incentive chain, in which all stakeholders, including European citizens, issuers, investors and society as a whole, derive concrete benefits.
To this end, the mortgage and covered bond industries can help to bridge the renovation gap with a private financing initiative, which is independent from but complementary to public funds, tax incentives and utility rebates, and in this way support the UK in meeting its carbon reduction targets.
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