COP26 and the impact on Property Finance

190 world leaders arrived in Scotland on 31 October this year for twelve days of talks at COP26 (the 26th UN climate change conference). COP26 is a key opportunity for nations to tackle climate change and, in the wake of Covid-19, there is a strong focus on countries ‘building back better’ their economies through green, resilient recovery.

It is said that the built environment is responsible for c.40% of global carbon emissions and recently we have seen a change in the real estate industry with widespread recognition for the need to decarbonise buildings and make real estate portfolios impervious to the impacts of climate change. Sustainable finance is seen as playing an essential role in delivering the scale and speed of the changes needed to accelerate the transition to net zero in this sector.

A pre-COP26 private finance strategy report was issued in November 2020, entitled “Building a Private Finance System for Net Zero”, which states that if global climate-targets are to be fulfilled, “every professional finance decision that is made needs to take climate into account.”  Underpinning the strategy are a set of key objectives, including the need for improvements in the quality of climate-related financial disclosure and ensuring that institutions are able to assess the credibility of, commit to and measure alignment of their portfolios with, net zero transition plans.

Improvements to reporting and disclosure standards are already underway with the Chancellor committing during day 3 (Finance Day) of COP26 to make it mandatory for firms of a certain size to disclose climate-related risks to their business, their environmental impact (in accordance with a proposed new UK Green Taxonomy) and their transition plan to net zero carbon emissions. We are seeing some portfolio managers already choosing to voluntarily report on the alignment of their property portfolios with ESG criteria in a bid to meet mounting demands from their creditors, investors and stakeholders for transparent, consistent and comparable ESG-related disclosures.

Many financial institutions are also developing and implementing transition plans to adjust their businesses to ensure that their investments and lending are aligned with net zero. For example, an industry led, UN convened group of signatory banks including Lloyds and NatWest Group, have formed the Net-Zero Banking Alliance which brings together banks worldwide representing over 40% of global banking assets which are committed to aligning their lending and investment portfolios with net-zero emissions by 2050.

Reflecting the macro financial position, we have seen a significant shift in the real estate finance market, with sustainability matters affecting lender, investor, borrower, tenant and developer behaviour.

Some key changes are:

1. lenders and borrowers changing their corporate structure and investment strategies to achieve B Corp status;
2. financial incentives in loan documentation to achieve environmental targets. This has been supported by the production by the LMA, APLMA and LSTA of the Sustainability-Linked Loan Principles, which are a set of market standards designed to promote the growth of sustainable loans; and
3. changes in design and building materials as well as choosing to redevelop existing buildings rather than building new structures;

Over a series of upcoming articles on sustainability and the impact on Property Finance, Charles Russell Speechlys will look at this topic further and discuss (i) how lenders are factoring sustainability targets into their credit analysis and how they are looking to lead by example to influence their customers (ii) the rise of sustainability principles in finance documents, reporting and disclosure on sustainable activity, and what voluntary sustainability projects we are seeing borrowers implementing and (iii) the role that sustainability is playing in property management and development.

This article was written by Isobel Young-Herries and Cara Fulker, for more information please contact them or your usual Charles Russell Speechlys contact.