Financiers incorporate ESG criteria in commercial real estate lending
Given climate change narratives, more complex due diligence being undertaken by purchasers, higher sustainability requirements by financiers, and growing social responsibility, commercial real estate is undergoing some significant shifts.
In its latest Total Property portfolio, Bayleys looks at how environmental, social, and governance (ESG) factors are playing out across the broader sector, particularly in the lending realm, as the lowemissions economy takes hold and the dial shifts on corporate and private accountability.
Bayleys national director of commercial and industrial, Ryan Johnson, said ESG was impacting lending, acquisitions, corporate governance and social responsibility, with the sector increasingly challenged to ‘‘step up and wise up’’ on ESG as it builds momentum globally.
‘‘Fundamentally, building owners must extend their identification of operational risk to ESGrelated factors to secure finance and to ensure an asset remains fit-forpurpose on a number of metrics to protect its capital value,’’ he said.
In Total Property, Bayleys spoke to Jo Kelly, chief executive of independently governed charitable trust The Centre for Sustainable Finance:
Toitū Tahua, set up in 2021 to accelerate progress toward an equitable, inclusive and sustainable financial system.
Kelly said the centre sat at the nexus of finance and sustainability by connecting, collaborating, enabling cross-sector projects and tracking progress towards the Sustainable Finance Forum’s 2030 Roadmap for Action goals.
‘‘Organisations should make sustainability commitments that are relevant and meaningful to them; however, if climate and human rights aren’t on their list, they may need to rethink their priorities.
‘‘Generally speaking, organisations that understand and face into the ESG risks associated with their business are better prepared to manage and mitigate those risks when they materialise – which they will.’’
Kelly said finance providers increasingly wanted to see demonstrable and credible long-term plans positioning a business to be resilient, cost-effective and competitive in a low-emissions economy.
For most, that would require a fundamental re-think of current business models, products and services.
For sustainability to be hardwired into the business and financial arena, attitudes, processes and systems need to be upgraded with clarity required from the Government on its policy and investment priorities, Kelly said.
‘‘The centre has been working with the government to determine whether New Zealand needs to codify definitions of sustainable economic activity into a set of definitions that can be used for investment decision-making.’’
Banks are challenged with embedding climate risk into the different stages of the credit lifecycle and aligning lending and investment portfolios with pathways to net-zero by 2050.
BNZ general manager property finance Phil Bennett said banks had always factored ESG into commercial lending requests, but today lenders were looking for documented and measurable strategies around the entire ESG framework.
‘‘Under scrutiny are ‘E’ considerations like land development impacts, in-depth analysis of Resource Consent approvals, reduction of carbon footprint in new-builds and upgrades, and exiting poor quality assets,’’ he said.
As ESG priorities were further embedded across the sector, commercial property developers, investors and tenants would all be impacted.
‘‘Legislation will increasingly impose additional compliance requirements, poor quality buildings will be further discounted in the market, and we will see more leases reflecting occupier ESG policies with specific ‘out’ clauses if agreed criteria aren’t met by a landlord.’’
He said sustainability-linked loans, primarily for premium A-grade commercial buildings, were on the rise with BNZ, and sustainability was actively being pursued by owners.
ASX-listed Centuria Capital views sustainability as a lever to delivering strong business outcomes, with its general manager sustainability, Clint Wilson saying ESG was being broadly distilled throughout Centuria’s internal and external business operations.
‘‘Investors, tenants and the wider community increasingly recognise the value that wellexecuted sustainability practices can have on real estate,‘‘ he said.
‘‘Sustainability is just good business. It helps us attract capital, retain tenant customers and support the communities we work in.
‘‘We partner with the right industry organisations and stakeholders to collaboratively shift the dial and demonstrate best practice.’’