As the principal green building industry specialist for IFC, a member of the World Bank Group that focuses on private sector development, Prashant Kapoor is also the inventor of EDGE, a green building certification system focused on making buildings more resource-efficient in more than 130 countries.
According to Kapoor, the scaling up of green buildings around the world will depend on the strong support of the financial sector. Most of today’s construction is happening in emerging markets, where there is easy access to finance. Banks will create innovative products to address the growing green building supply if they are convinced that investments will deliver.
Are green buildings more profitable because of higher long-term value or lower default rates? Are customers saving energy and water in these buildings as predicted, and are they more comfortable living and working in them? The opportunity lies in whether banks can see green buildings as a new and valued asset class.
View part one of our video interview with Kapoor:
Kapoor has examples at the ready as to how banks can recognize green building worth. On the commercial side, if evidence shows the resale value of an office building is 10 percent higher with less risk, then concessions can be made on the construction finance rate. On the residential side, a green homebuyer with a mortgage payment of $200 and potential savings of $20 per month on utility bills could put down a lower deposit or be allowed to borrow more.
“That’s 10 percent of the monthly payment already in the bag for the homeowner,” Kapoor says. “With more expendable income on hand, the ability to pay back the monthly mortgage is higher, and therefore less risk.” Green mortgages are comforting for the property developer too, who can charge 1 to 2 percent more for the home and pass on the cost.
Kapoor cites Mexico as the best example of a country where green mortgages have reached scale. Infonavit, the government’s social mortgage lender that controls more than 70 percent of the market, was so successful at offering green mortgages that it stopped issuing regular mortgages.
Green construction financing and green mortgages require that banks get their hands on liquidity, and that solution is the new green bonds market. Kapoor advises that it’s a small industry right now, at $120 billion, but is growing at 30 percent per annum. Green bonds, which are financed by municipalities, corporations and institutional investors, mostly support renewable energy projects.
For buildings, third-party verification is needed to determine if the asset is truly green. Because banks don’t have the internal technical capacity to make this call, this is where EDGE and its certification partners, such as GBCI, enter the picture.
IFC created EDGE to satisfy a gap in the market for a metrics-driven solution supported by the investment community, says Kapoor. There was a need for a scalable platform that brings together technical know-how with investment planning for decision-making purposes, to identify how much it costs to design a resource-efficient building and what the savings will be. EDGE requires that a minimum standard of 20 percent less energy, water and embodied energy in materials be met so that financial institutions will know that “with EDGE-certified buildings, you’re confident that you have at least 20 percent better performance than the rest of the market.”
EDGE is now an eligible standard under the Climate Bonds Initiative, and other development finance institutions are adopting EDGE as eligibility criteria for their own pipelines, including CDC, EBRD, FMO, IDB, KfW and Proparco. Kapoor says the secret is partnerships, with global players like GBCI offering certification services for EDGE in 125 markets for projects ranging from humble homes in Haiti to Asian corporate headquarters in China. Yet EDGE remains intrinsic to IFC’s own way of doing business, where Kapoor helped build IFC’s green buildings portfolio to $3 billion in just five years.
As data is captured for EDGE-certified properties, Kapoor will channel the results to the wider market to prompt action. He sees Energy Star as a good example of a metrics-driven rating system that won widespread appeal, with studies proving that green homeowners have a third lower default rates. “Imagine from a bank’s perspective,” says Kapoor. “When results show that homeowners with resource-efficient properties are 32 percent less likely to default, that’s quite powerful.”
There will come a turning point when it’s clear that green financing is working, and the results will be self-evident from an environmental viewpoint, says Kapoor. When the building industry is reined in within nine gigatons or less of carbon emissions, then we know that green financing has succeeded, he believes.
It’s up to bankers to roll up their sleeves and come up with products for the building industry that respond to lower risk, believes Kapoor. Only then will subsidies no longer be needed, and the market will rely on itself for transformation. That most of the financing through green bonds has gone to renewable energy in the past five years is a chance for the building industry to do better.
“This is the big role that banks can play in the future,” says Kapoor, “and where the opportunity lies for the green building industry.”