Real estate executives at the front of the industry’s push toward sustainability will gather in New York City in a few days for Climate Week – the annual event coinciding with the U.N. General Assembly when business and government leaders join together to tackle climate change.
One topic that’s sure to be eagerly discussed is green bonds, a niche area of financing that’s seen a surge over the past 15 months among U.S.-based real estate investment trusts, which have issued more than $3 billion worth of the sustainability labeled corporate debt.
But as the green bond market picks up steam, real estate’s most active issuers are eschewing some of the industry’s best practices when it comes to transparency. And critics says the green bonds program has failed to live up to its goal of providing a cheap source of funding to promote environmental projects that otherwise wouldn’t get off the ground.
“The entire green bond market is more or less a greenwashing instrument,” said Stanislas Dupré, founder and CEO of the think tank 2 Degrees Investing Initiative, and one of green bonds’ biggest critics.
“If you take a LEED-certified commercial building in Manhattan, or a prime residential in an expensive part of Brooklyn, there’s no shortage of financing for that,” he added, explaining that very few bonds are priced at a point where they make the financing materially less expensive. “I think by design you can never reach this point.”
Yet even those who fault the green bond program praise the fact that developers tapping the market are usually on the cutting edge of developing efficient buildings to high standards like LEED certification. And those REITs say that as long as they’re developing environmentally friendly buildings, they see value in the growing climate bonds market.
Alexandria Real Estate co-president and chief financial officer Dean Shigenaga, whose company has issued $1 billion worth of green bonds since last summer, said there was an increase in investor demand for the firm’s green offerings.
“There’s no question there’s more demand from investors who wanted to increase allocations for their sustainability or green initiatives,” he said. “If we had a choice between a green bond and a regular bond, I think we would always lean toward green.”
Gang Green
Green bonds, also known as climate bonds, are debt instruments in which the proceeds are earmarked to be used for projects that benefit the environment. They’re usually financed by investors who have set quotas to allocate a certain amount of capital to tackle climate change.
And over the past decade they’ve become increasingly popular.
The global green bond market hit a milestone in 2019 when new issuance surpassed $100 billion by the mid-way point of the year for the first time in history, according to the nonprofit Climate Bonds Initiative. That’s still a ways off from the $1 trillion-a-year target advocates have set for the market to reach by the early 2020s, but still represents an exponential rate of growth.
Green bonds are part of a broader category of environmental, social and corporate governance programs known as ESG. But like other socially conscious driven investments – such as the Trump administration’s Opportunity Zones program – there are questions as to whether these programs are actually promoting social good, or merely providing the appearance of doing so.
“From a REIT perspective, it’s just marketing,” said Sandler O’Neill analyst Alex Goldfarb. “For one, there’s no real way to measure cash flows on the back end.”
Since bonds finance a company’s balance sheet as opposed to specific developments, trying to trace the path of a green bond is like trying to follow a particular drop of water poured into a drinking glass.
“Money’s fungible,” Goldfarb said.
Sam Zell’s Equity Residential, for example, issued a $400 million green bond in December – the first for an apartment REIT. The company said that pending allocation of the proceeds to finance or refinance green projects, it will use the cash to pay down its credit revolver and outstanding commercial paper.
Alexandria Real Estate Equities, likewise, said it would initially use the proceeds from its $450 million green bond last June to reduce the balance on its unsecured line of credit.
“Payment of principal of and interest on the [green notes] will be made from our general funds and will not be directly linked to the performance of any Eligible Green Projects,” the company wrote in its prospectus.
Alexandria’s Shigenaga said the company is cognizant not to allocate too much of the green bonds proceeds to pay down old debts.
“I think in our view we don’t want to get more than 50 percent historical because I think the investors want to see the prospectus spent on eligible projects,” he said.
Equity Residential and Alexandria Real Estate, along with Boston Properties and Kilroy Realty, have issued a combined $3.6 billion in green bonds since last summer, according to an analysis by The Real Deal. But according to the Climate Bond Initiative’s database, none of the companies submitted their offerings for second party opinions – an external review to certify a bond’s environmental impact that’s considered a best practice in the industry.
“It is up to the issuer whether or not they want an external review,” said Trisha Taneja, a manager at Sustainalytics, a company that rates firms on their ESG performance. “I think that more often than not it’s highly recommended because investors require it.”
Bank of America/Merrill Lynch was the book runner designated as the “green structuring agent” for Equity Residential, Kilroy Realty and Boston Properties’ bond offerings. The bank has been accused of using such environmental activities to greenwash its record of simultaneously financing the fossil fuels industry.
Measuring Impact
Green bonds got their start in 2008, when the World Bank floated a $440 bond and defined the criteria for green bond projects.
Vornado Realty Trust and the shopping centers REIT Regency Centers were among the first U.S.-based real estate companies to tap the market when they issued their own climate bonds in 2014.
As far as public reporting went, Vornado in its 2015 sustainability report made only general references to the bonds and its sustainable programs, rather than provide the kind of specific “impact reporting” that lays out the specific reductions in building emissions the bonds financed.
(Vornado’s green bond was originally set to mature in June of this year, but the company called the bond in 2017.)
“Vornado essentially reports the amount invested by type of project, rather than by project itself. And they don’t disclose/describe each project funded. Both of these would be best practice,” Miguel Almeida, a research analyst at the Climate Bonds Initiative, wrote in an email.
Vornado declined to comment.
Almeida noted that Vornado described the benefits of its green renovations and referred to specifications like LEED – disclosures that he said were pretty good as far as standards went in 2015.
“Since they don’t quantify the impacts of the projects, they can’t be said to provide impact reporting, but they do describe the benefits of the investments and refer specifically to buildings certifications such as LEED,” he said, “which is something.”