RFP Magazine Article: Green finance breaks barriers for global real estate

The following article, written by Lisa Michelle Galley, was published in RFP Magazine, on 3 March 2010. RFP stands for “Real Estate, Facilities, Projects”.

RFP Magazine focuses on investment real estate across Asia.

The article published under the title “The Financial Barriers to Real Estate Can Be Overcome, Explains Lisa Michelle Galley”.

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Community officials, property owners and citizens are changing the world – working hard to extend regional social, environmental and commercial vitality. This is driving exponential growth in energy efficient and environmentally-certified (collectively called “green”) buildings, since some people realize that green buildings are clearly better performing investments that release funds trapped in wasted resources back into the pockets of workers and local economies.

Yet, green building opportunities present major challenges for today’s financial sector. In Living Cities (2009), a collaborative of 21 global financial institutions, cities named a lack of funding as their number one challenge for developing large-scale green building programs. Commercial banks have difficulty with pricing energy savings as an asset. Investors are still getting comfortable with factoring water and energy performance into property pricing decisions.

To address these barriers, governments and private investors are combining green financial products with traditional ones, into systems of finance products and mechanisms, to introduce transparency about building performance into markets, and direct capital into and from green buildings.

These new financial solutions, organized at the district or community level, are implemented via public-private collaborations. Implementing these programs requires moving through a series of nested considerations from determining the interests of diverse stakeholders to structuring the right finance mechanisms for communities and investors as well as for reducing greenhouse gas emissions through day-to-day activities.

Understand the Interests of Stakeholders and their Markets

Financing green starts with understanding the real, often unspoken expectations of each stakeholder. Property investors need clear green investment cases. Home buyers seek to reduce their energy costs and ensure safe air quality for their children. City officials want to limit resource expenditure on public infrastructure.

Incorporating these expectations into any green finance assessment promises crucial insights.  Participants can increase the impact of initiatives, since finance options are simultaneously compared to everyone’s interests and available opportunities. They also provide an early warning system about potential roadblocks, saving the time and money associated with creating financial solutions which were doomed from the start.

New Tools for Green Finance

Accelerating green buildings requires that communities and investors obtain capital for their projects. Below are a few new, popular and innovative green finance products that assist with both individual projects and large-scale transformation.

Green bonds: Socially responsible and ethical investors are a potent source of capital, but have traditionally shied away from investing in real estate, since it does not clearly align with their mission requirements. However, as a US$2.71 trillion market “on a mission”, socially responsible investors (SRI) are increasingly stepping up to partner with communities by buying green bonds issued by local governments that fund large-scale retrofitting of low income housing or regeneration of blighted urban areas. Recent examples include the EU-issued EUR1 billion in “Climate Awareness Bonds” in 2007. In the United States, bonds for ‘tax-lien’ financing, such as those issued by Sonoma County in spring 2009 and the upcoming GreenFinanceSF are growing in popularity, with more than 95 Californian cities either operating or in the process of establishing similar programs.

Commercial bank green loans and investment products: When a municipality implements sustainability initiatives, the continued access of businesses and consumers to credit services is often taken for granted. However, this as well as an adaptation of those products to better fit with the municipality’s sustainability objectives for buildings, is a critical area of analysis which often goes overlooked. As a result, many communities watch as sustainability initiatives falter, since they do not see sufficient private market credit and investment taking place. Often times, they fail to understand exactly how much credit for buildings actually comes from local banks.

When the South Korean government announced a national “low carbon, green growth initiative”, several of the nation’s largest lenders, including Kookmin Bank, also announced their roll-out of many types of green financial services and products. The products not only cover residential and commercial green building loans, but also extend to industry with asset management, project finance and insurance.

Climate Benefiting Finance: Some communities and investors are even requesting green finance solutions that are sophisticated and scalable enough to transform the national economy. Introduced in June 2009 by the winning ‘c_life’ team in Sitra’s Low2No competition in Helsinki, Finland, climate benefiting finance is a replicable set of economic frameworks that will help to assure a private finance market that values green buildings. The frameworks consist of many interrelated systems of green financing mechanisms, all designed to price and deliver finance in a way that rewards carbon savings within businesses, real estate projects and the carbon-related behavior of private individuals. Here, the goal is to use finance to ignite profound change and diffuse new ways of thinking about sustainability.

Designing Green Finance Mechanisms for Impact

Molding green and traditional finance products together into a customized program sets the stage for finance that is truly aligned with driving sustainability.

First, stakeholders jointly analyze their situations and cross-educate each other about their individual risks of continuing business-as-usual. Second, the government will comprehensively assess the availability of incentives available to the building owner, to understand which ones most closely complement their objectives and those that conflict. Third, the initiatives’ attractiveness to private sector capital sources will be researched. Fourth, they will focus on needed partnerships with private financial institutions to assist the development of the loan products, that work best with program funds that public agencies may provide for green buildings.

From those evaluations, officials, investors, financial institutions and citizens can obtain a common understanding not only of their individual green business case, but also of the interrelationship of their success within the green initiative and the success of others.

Market-tailored tools such as investment and credit underwriting protocols for green buildings, benchmarking and metrics to measure property performance, as well as new monitoring and reporting regimes to assure feedback, will strengthen the initiatives’ success.

The gains of incorporating green finance mechanisms into sustainability initiatives are transparency and clarity. When everyone at the table is able to actively benefit, barriers fall and the complex dialogue becomes much clearer and simpler.

Galley Eco Capital helps Helsinki to reduce carbon emissions

San Francisco-based sustainable finance consultancy Galley Eco Capital was announced as part of a winning team for the redevelopment of the Jatkasaari district in Helsinki, Finland, which will be an urban zone with low or no carbon emissions.

Sitra, the innovation agency of the Finnish government, revealed today that the winning team for their “Low2No” development design competition was made up of Arup, Saurbruch Hutton, Experientia and Galley Eco Capital. The multi-national team was selected out of 74 initial entries, for their “C_life – City as Living Factory of Ecology” project.

Galley Eco Capital  brings their unique perspective as an international sustainable finance consultancy with a focus on creating green and socially responsible finance and investment programs.  Galley Eco Capital’s work complemented the architectural and consumer behavioral aspects of Jatkasaari by contributing new ways for finance to transform both the district and Helsinki market, to positively impact people’s lives.

The competition jury stated that the innovative monetary/economic model presented contributed significantly to the team’s clear top-down as well as a bottom-up strategy for leveraging the Jätkäsaari opportunity, in the spirit of the Low2No challenge.

Sustainable finance for Jatkasaari and Helsinki

While other team members devised the design, energy and consumer behavioral strategies for the project, Galley Eco Capital’s responsibility was to create an economic and funding model, which would support the project by integrating traditional and socially-responsible capital sources and products at a regional market level and set the right incentives to achieve maximum effect in terms of emissions reduction, energy efficiency and resource savings.

Starting with a thorough analysis of Sitra’s environmental and socially-responsible real estate objectives, the Finnish climate change agenda, and Finland’s participation within the global environmental finance markets, Galley Eco Capital developed ways to create a reliable pipeline of green mortgage, environmental, energy and carbon finance capital for Jatkasaari.

These products would all seamlessly connect with the traditional Finnish financial network to form a holistic financial system. Delicate synthesis was also required to create a flexible market structure, which would monetize available sustainability benefits while adequately funding the Jatkasaari project throughout construction and operation.

About Galley Eco Capital

Using their expertise in designing and implementing sustainable finance and investment programs, Galley Eco Capital’s strategies help investors, lenders and regional governments to bridge traditional with green finance and efficiently monetize the available sustainability benefits embedded within their real estate and renewable energy initiatives.

Galley Eco Capital’s unique approach assures more successful solutions through the application of interaction design principles, driven by culturally-aware, user-centric perspectives and underpinned by long years of international real estate and capital markets experience.

The strategies help drive positive change by:

• developing debt and equity financing structures based upon the value-add contributed by sustainability and energy efficiency,
• synthesizing traditional with emerging green financial products into holistic financial solutions,
• sourcing and structuring incentives and government subsidies to offset program costs,
• designing and monitoring sustainable investment performance measurement to assure positive program impact

Over the next 6 years, the Jatkasaari district will be designed, constructed and opened to the public. From there, the sustainable ideals that govern its day-to-day life will act as a model and example for the rest of Helsinki, Finland and the world. Through Galley Eco Capital, San Francisco will be a vital part of this journey.

For more information on the Low2No project, or on Galley Eco Capital, contact Lisa Michelle Galley, Managing Principal, at +1 415 655 6668, or via email at “lisa at galleyecocapital dot com”.