How to scale up investment in energy-efficient real estate

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Frederic Janbon, CEO of BNP Paribas Asset Management, recently addressed a high-level event on Energy efficiency in buildings: How to accelerate investments?. Co-organised by the European Commission and the French Ministry for Ecological and Inclusive Transition in partnership with the UN Environment Finance Initiative (UNEP-FI), the meeting was part of a climate summit convened by President Emmanuel Macron, the President of the World Bank and the Secretary-General of the UN. Here, we present the highlights from Frederic Janbon’s speech.

Few topics arise in our society that present such a win/win scenario for all stakeholders as energy efficiency. It epitomises how one strategic decision – that of investing in energy efficiency – can bring significant benefits to us all, as a society.

It is recognised as one of the most cost-effective ways for the European Union to mitigate the risks and maximise the opportunities associated with climate change and energy security.

The EU has been successfully improving its energy efficiency record. Between 1990 and 2016, the EU 28’s energy consumption fell by 2%, while its GDP grew by 54%. This represents an improvement of about 36% in GDP per unit of energy consumed.

EEFIG: an effective working forum to promote energy efficiency

Given the relevance for the EU, the European Commission and UNEP-FI established in 2013 the Energy Efficiency Financial Institutions Group (EEFIG). Like the Institutional Investors Group on Climate Change (IIGCC), this is a working forum that draws together the financial community to discuss how energy efficiency investments could be scaled up. BNP Paribas Asset Management has been part of it since its inception.

The EEFIG has made a number of very valuable recommendations to investors , of which three in particular stand out. Investors can:

  1. Contribute to the scaling up energy efficiency investments in buildings by allocating long-term capital to the most efficient listed and private assets
  2. Directly engage with their corporate investees to improve the latter’s energy efficiency
  3. Support the development and deployment of investment vehicles and instruments to help finance energy efficiency.

In response to the first of these recommendations, we have been assessing since 2013 how real-estate companies manage climate change risks and opportunities in the European index of listed Real Estate companies (EPRA Index). We are about to extend this to cover developed real estate listed markets worldwide. We benchmark the companies against a set of indicators that we have developed internally, and which relate exclusively to climate change.

One of the key pillars of our analysis is energy consumption and energy efficiency. This exercise helps us define our investment universe, so that we can select the best performers and reward those companies making progress.

European real-estate companies, generally speaking, have made good progress. Yet much more needs to be done since 67% of the companies have not established (or do not report on) quantitative targets for emissions or energy consumption reduction.

Direct engagement to urge improved disclosure

Secondly, we have been engaging directly with the real-estate companies that fall within the EPRA index. Through an external provider, we have been tracking their CO2 emissions, energy consumption and the progress made over time by the companies we invest in. Given the persistently poor levels of disclosure, despite the progress which has undeniably been made, we have been engaging particularly with those companies whose disclosure still needs to improve significantly.

The third key recommendation made to investors was the need to promote, encourage the development of, and invest in financial instruments that may be used, directly or indirectly, to finance energy efficiency. One of the vehicles highlighted by the EEFIG as having the largest potential to help scaling up investments is green bonds.

Green bonds: still far from their full potential

We have been investing in green bonds since the very start. We have developed a strict methodology that verifies the ‘greenness’ of each bond. However, only now have we felt there was enough diversification in the market to manage a dedicated fund which invests only in green bonds.

Launched in September, 26% of the fund is now invested in green bonds which specifically are geared to improving energy efficiency, whether the issuers are cities, local authorities, banks, corporates or sovereigns.

Despite the extraordinary growth this market has experienced in the last four years (from USD 20 billion in 2013 to USD 300 billion today), this is still a market which is in the very infancy of its potential.

Aggregating small investments to gain market acceptability

One of the key challenges is that of aggregating many small investments into a size that capital markets will accept. In other words, the need to develop financial products able to aggregate energy efficiency investments is a priority if we want to engage small enterprises and individual citizens.

We have at BNP Paribas Asset management an infrastructure of funds that enables us to buy green securitisations, which have experienced impressive growth. Through these funds, we were able to support and buy green RMBS (residential mortgage-backed securities).

Obvion’s two RMBS have been the first of their kind issued in Europe. The underlying assets are mortgages secured on energy efficient homes. These types of securities can really help to give SMEs and citizens access to capital markets.

Another interesting trait is that Obvion has marketed the Dutch RMBS to green bond investors. Thanks to our ESG credentials, we were allocated four out of the EUR 156 million as opposed to the one or maximum two that we would otherwise have had.

We are also developing new investment strategies focusing on private & real assets debt that will integrate ESG – with a special focus on climate change – into the investment decision-making process.

Energy efficiency: gaining and sharing knowledge and savoir faire

Being part of the EEFIG has helped us to understand the complexities and hurdles we face when trying to improve energy efficiency levels in Europe for the benefit of all, and for the benefit of our investments, whether we are a public financial institution or a private one, whether we sit at one end of the financial value chain or at the other. We have gained knowledge and savoir faire from this open dialogue and this shared learning process over the past four years.

We are delighted to see that this work does not stop at the EU level, but that the G20 Energy Efficiency Finance Task Group (EEFTG) is taking the lead at a more global level.

It also pleases us to know that our peers on the IIGCC and UNEP FI property working groups of which we are part value our contributions and opinions as much as we do theirs. After all, as global investors, it is in all our best interests to move ahead together in this way.

Frédéric Janbon

Chief Executive Officer and Head of Investments

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