Innovative Green Loans Can Boost Zero Energy Commercial Buildings

Building owners and tenants are increasingly interested in green and net-zero building credentials. This increase is driven by the need to reduce emissions and pressure from environmental, social, and governance-conscious investors and tenants. Although new construction can often incorporate net-zero designs at the outset and energy service company models are gaining ground, bank financing has often limited net-zero retrofit opportunities in existing commercial buildings. A recent special green incentive loan structure from Dutch bank ING promises to change this situation, offering a model for green financing in both commercial and residential applications.

Removing Barriers to Commercial Green Loans

ING’s incentive loans begin with slightly lower rates than traditional loans, but the main innovation is that incentive rates decrease both upon a borrower’s commitment toward and achievement of a green certification for the asset. The incentive loan also provides reimbursement for green upgrades according to ING.

ING’s loan structure makes green loans more attractive and incentivizes building investments by lowering barriers to entry. These investments could include envelope improvements and end-use equipment purchasing, particularly in energy-intensive end uses such as HVAC and lighting systems. Equipment replacement in these areas often greatly improves building efficiency since these loads are usually the largest in commercial buildings. ING’s innovation is especially timely as end-of-life equipment replacement spending is a rapidly growing share of building maintenance budgets due to an aging building stock according to the Brookings Institution.

A Model to Follow in Residential Loans?

The ING model is likely to be successful in commercial markets for a variety of reasons. One significant tailwind comes from green mortgage-backed securities or green bonds, which command a modest premium in the financial markets. Green bonds issued from incentive loans are likely to find willing buyers. In the US, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have become the world’s largest issuers of commercial green bonds, with over $75 billion issued over the past 10 years.

Would a green incentive loan structure work in single-family residential? Staying in the US, GSE green loan adoption among single-family residential borrowers is low compared with the commercial sector, with around $250 million of single-family green mortgage-backed securities issued annually. However, the US residential opportunity is immense because the GSEs originate trillions in single-family loans. Even a modest penetration of that market would easily surpass commercial green loan figures.

Data can be a key barrier and potential enabler. Commercial lenders often have access to portfolio-level metrics on energy performance and other operational data needed for efficient underwriting. For green loans to catch on in single-family homes, the highly commoditized transactions in today’s mortgage industry would require streamlined home energy audits and more comprehensive available data on large numbers of homes. Increased sales of home energy management systems that can better track energy performance can help provide this data. They can also bolster the value proposition of today’s home energy management systems and aid utilities’ demand side management, demand response, and other programs. For more information on home energy management systems, see Guidehouse Insights’ report, Guidehouse Insights Leaderboard: Home Energy Management Providers.