Sustainability is increasingly becoming an important factor in granting loans. For example, for certain investments the level of interest depends on the sustainability performance or specific sustainability requirements are set before the loan is granted by banks. Mainly larger organizations use such green financing mechanisms, one of these organisations is SBM Offshore, which we interviewed earlier about their Sustainability Linked Loan. But how does green funding work for a relatively enterprise? We asked our client Vastned, who we were able to support throughout the green financing process from the sideline, to give us more insight into the recent green loan they have raised.
We questioned the brand-new CEO of Vastned, (Investment and BI manager) among others: what was the basis for the collection of the green loan? How did the process go? How does this loan help Vastned to become more sustainable?
Since 2011, Vastned has focused on investing and renting retail real estate out in the shopping streets of selected European cities with a historic city centre. Preserving cultural heritage and maintaining the quality of life and safety in these historic inner cities is of great importance for Vastned and forms the core of Vastned’s sustainability policy. This way, Vastned aims to create long-term value for all its stakeholders. Its sustainability mission is, therefore:
“Investing in historic cities to demand the functional life of buildings and prolong to the attractiveness and liveability of inner cities.”
Reinier explains that the new strategy published in 2021 and the sustainability mission are complementary to each other, and lead to stable and predictable long-term results. “If you have a portfolio that is not sustainable in its roots, you will notice it in the long run. If you do not act out of your own motivation, the government will take care of it. For example, from 2023 the Dutch government requires office buildings to have at least an energy label C, otherwise, they may no longer be used as offices.”
In addition to developments in legislation and regulations, their feeling that “everyone must do their fair share and take personal responsibility ” underlies the development of the Green Finance Framework (GFF) for Vastned. This framework is used to raise funding that can be allocated to sustainable and energy-efficient buildings. Vastned indicates that it has developed the GFF to align its financial objectives with its sustainability objectives. Using the framework allows Vastned to issue various green financing instruments, including green bonds, green credit facilities and other green debt instruments. This enables Vastned to refinance commercial and residential real estate that contribute to the preservation of historic city centres. Reinier adds that “the framework forces us to stick to what we say, and be disciplined when it comes to sustainability. In addition, retail real estate is not the easiest to finance at the moment, but when we take sustainability into consideration, banks are more interested. That’s a positive development.”
Under this framework, Vastned has agreed on a Green Revolving Credit Facility (RCF) in which ABN AMRO and Rabobank each participate in for € 20 million. Vastned’s stakeholders reacted positively to this. On the one hand because, from a purely financial point of view, liquidity is now very important, partly because ofthe uncertain times due to COVID-19. On the other hand, because sustainability, or ESG, is getting more and more attention from analysts and investors, such financing is received positively.
How does the process of raising green funding work and what is the difference with raising non-sustainable funding? “Reinier: “It starts with the discussion whether you have a portfolio on which you can base a GFF, for that you need insight in the properties in your portfolio, such as the energy labels. One of the challenges is that this insight differs per country, for example, in Belgium it is much more complicated to identify which energy label a building has than in the Netherlands. The next step is to ensure that a larger part of our portfolio has a label, ideally label A of course. This makes it feel more like a mortgage loan with a focus on sustainability aspects of the collateral.” Bozidar adds; “Having to properly understand and interpret the guidelines around the Green Finance Framework and how to set up internal procedures makes the process especially complicated. However, thanks to experts from ABN AMRO, Rabobank and Sustainalize, the process went smoothly. In addition, we would advise parties who also consider setting up a GFF not to underestimate the importance of the data requirements of sustainability reporting and the processes involved.”
The challenge for Vastned was therefore not so much in the process, but more the collection of data on tenants’ consumption of gas, electricity and water, as the properties are let casco. Insight into this data is important for linking Key Performance Indicators (KPIs) to green financial instruments and for taking targeted energy-saving measures. Measuring is knowing, as many Sustainalizers say.
Another challenge is to increase the proportion of sustainable properties. “We aim for every home we (re)develop to become an A label and always take this consideration into account in what we do, just as we normally do with safety. However, this remains complicated because we have older properties, sometimes up to 400 years old, where the options to become more sustainable are limited, partly due to legislation and regulations.”
Although extending the functional life of existing buildings can be seen as sustainable, Vastned believes that too little attention is still being paid to improving the sustainability of historic buildings. New For example, limited attention is paid to historic buildings within the newly developed EU Taxonomy, which is part of the EU Green Deal to steer more financial capital towards sustainable activities and innovations. This Taxonomy aims to create a framework for what is, and is not sustainable in order to avoid ‘greenwashing’. The EU Taxonomy is an opportunity to become more sustainable since the EU will provide €503 billion for actions to reduce the impact on the environment. However, this opportunity will be limited for Vastned as there is a lot of focus on new-builds and little consideration is taken for inner-city monumental buildings that are often difficult to make sustainable. The Taxonomy recognises that it is indeed difficult to incorporate the built environment specifically into a taxonomy. Reinier adds; “To preserve the cultural heritage of the inner city and to reward investors who maintain this cultural heritage, we hope that the European Union will not impose unrealistically strict requirements on this type of real estate.”
In short, the Green Finance Framework and the EU Taxonomy both provide an impetus to increase sustainability. Vastned will work in the coming years to increase insight in sustainability data and to translate this into action to make existing buildings more sustainable where this is technically possible. The GFF and the Taxonomy are a great opportunity to convince certain stakeholders of the need to invest in sustainability.